>KOTAK MAHINDRA BANK

The standalone bank reported PAT far ahead of our estimates at Rs 186.9 crore (107% YoY) against our estimate of Rs 159 crore. Even the NII surged 24% YoY to Rs 508.2 crore. On a consolidated basis, PAT grew 27% YoY to Rs 327 crore but sequentially declined by 21.7%. The
performance of other capital market subsidiaries continued to suffer, losing market share sequentially. We expect the banking business to grow at 25% CAGR over FY10-12E delivering an RoE of 18-19%.

■ Loan growth boosts NII, raises FY11E targets…
Strong traction in advances, growing 35% YoY and 11.6% QoQ to Rs 23,185 crore was supported by incremental growth in mortgage and corporate loans. Growth in corporate loans continued to dominate with a 62% YoY jump, an increase of Rs 1848 crore. Of this, about Rs 400 crore went to the telecom sector, the one off spurt most banks are witnessing. On the other hand, deposits grew 38% YoY and 0.7% QoQ. NII grew 24% YoY with NIM at 5.7%, declining from 6.1%. The shifting credit mix from the personal loan book to low yielding corporate and mortgage had led to
a dip in margin. We expect NIMs to remain in the 5.5-5.6% range during the next couple of years.

■ Subsidiaries performance – a drag on overall profitability
The securities business continued to lose market share (3.7% in Q1FY11 vs. 4.5% in Q1FY10) from the unorganised sector. Average daily turnover stood at Rs 4000 crore vs. Rs 3,600 crore in Q4FY10. AUM of Kotak AMC declined from Rs 307 billion in Q1FY10 to Rs 285 billion Q1FY11 mainly on liquid funds withdrawal as equity AUM has marginally dipped from Rs 48 billion to Rs 45 billion. However, regulatory pressures led to significant slump in PAT at Rs 74 crore, down from Rs 139 crore over same period.

Valuation
Strength in the banking business has resulted in 50% of the valuation of the stock price coming from the same (2.5x FY12E ABV). With the AMC and insurance businesses under regulatory scanner and the broking business losing market share, we have revised their multiples lower and
arrived at an SOTP target of Rs 831 with an ADD rating on the stock

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