>KOTAK MAHINDRA BANK (MORGAN STANLEY)

Quick Comment: Kotak reported consolidated F1Q10 earnings of Rs3.3 bn, up 153% YoY and 11% QoQ. Key trends during the quarter:

1) Kotak’s lending businesses showed good momentum during the quarter as the loan book grew at 10% QoQ (23% YoY), driven by growth in both the Bank and Kotak Prime.

2) With the exception of asset management, trends in the other capital market linked businesses were muted. Overall capital market linked income (ex-capital gains) were down 13% QoQ.

3) Asset quality trends were mixed. The standalone bank’s NPLs rose 7% QoQ, while other businesses (Kotak Prime) saw a 12% QoQ decline. Credit costs for the standalone bank increased to 250 bps as the bank increased coverage from 41% to 50%.

4) The bank remains well capitalized with a Tier I ratio of 18.3% at the group level.

Lending businesses showing good growth momentum: Kotak’s lending businesses delivered good growth for the second consecutive quarter as it appears management has started to become more comfortable with asset quality and macro outlook.

Consolidated loan book grew by 10% QoQ (23% YoY), driven by growth in both Kotak Bank and Kotak Prime. The top three segments where the bank delivered good growth were corporate banking (+19% QoQ, +67% YoY), home loans (+15% QoQ, +21% YoY) and auto loans (+6% QoQ, +23% YoY).

Margins for the consolidated entity were steady at 6.3% (and up 40 bps QoQ). However, we note that the share of corporate loans in overall loan book increased to 30% from 28% in the prior quarter and 22% a year back. Hence, it seems unlikely that the bank will be able to sustain margins at these levels into the future.

To read the full report: KOTAK MAHINDRA BANK