>KOTAK MAHINDRA BANK (MORGAN STANLEY)

Capital Market Linked Businesses Rebound, But NPLs Rise

Quick Comment: Kotak reported consolidated F1Q10 earnings of Rs2.6bn, up 72% YoY and 22% QoQ.

Key trends during the quarter:
1) Growth during the quarter was driven by a rebound in capital market-related businesses. PBT for these businesses increased 93% YoY and 206% QoQ.

2) Credit issues continued with gross NPL levels rising – up 100 bps during the quarter to 3.4%. Most of the increase was concentrated in the small value personal loan segment.

3) Banking business trends remained muted with NII progression still weak and the bank choosing to re-focus the loan book toward lower yielding corporate loans.

4) Tier I increased to 18.3% from 16% in the previous quarter.

We believe that Kotak management has been proactive in managing asset quality through moderation in growth and has a strong balance sheet with high Tier 1. Also, market-related businesses should continue contributing to earnings as capital market activity picks up further. However, stretched valuations lead us to maintain a UW rating on the stock.

To see full report: KOTAK MAHINDRA BANK