Tuesday, November 3, 2009


Advances growth rebounds; NPLs decline
Kotak Mahindra Bank (KMB) reported consolidated PAT (excluding life insurance) of INR 2.96 bn (in line with our expectation) in Q2FY10, almost double Y-o-Y and up 15% Q-o-Q. Profitability of the auto financing business surprised positively; earnings of banking, securities, and asset management businesses were in line with expectations, while investment banking profits were below our expectations.

Consolidated advances grew 11% Y-o-Y (15% Q-o-Q) to INR 268 bn, primarily led by strong off take in auto loans and corporate credit. The bank is consistently paring its exposure in highly-delinquent personal loans; home loans/CVs remained flat. Consolidated NIMs were maintained at 6% despite a shift in product mix towards corporate/SME and car loans, due to sharp decline in funding cost (benefit flowed from low-cost sweep deposits now forming a significant chunk of
deposits). Consolidated gross NPLs (excluding stressed assets) declined from 3.41% in Q1FY10 to 2.93% in Q2FY10 as accretion to NPLs is slowing down and net NPLs declined to 1.7% (from 2.07% in Q1FY10).

Profits in banking business grew 163% Y-o-Y and 39% Q-o-Q to INR 1.26 bn driven by strong advance growth and lower provisioning. Performance of Kotak Mahindra Prime (auto finance business) was back on track during the quarter— advances grew 8% Y-o-Y and 18% Q-o-Q and profits rose 11% Y-o-Y (almost doubled Q-o-Q) to INR 395 mn due to lower provisioning. Kotak Securities reported a profit of INR 759 mn (up 85% Y-o-Y and almost flat Q-o-Q), in line with the performance reported by peers. Investment banking reported profits of INR 41 mn (compared to profit of INR 48 mn in Q1FY09), which was below our expectations. Asset management (domestic and international) reported strong profitability due to sharp growth in AUMs. Life insurance reported a profit of INR 40 mn (compared to INR 51 mn in Q2FY09 and INR 11 mn in Q1FY10).

Outlook and valuations: Positive; maintain ‘BUY’
KMB has clearly stepped up the pace of loan book growth with YTD growth in advances at 19%. Accretion to NPLs is slowing down and we expect gross NPLs to decline further. However, RBI’s advice to maintain higher provisioning coverage at not less than 70% (currently at 35%) will dent the bank’s profitability over the next 18 months. We expect KMB’s banking business to grow its profitability by 24% CAGR over FY09-11E. We are revising our earnings estimates up for
securities, asset management, and auto financing businesses, while lowering them for the investment banking business. Our EPS estimate now stands at INR 29.3 for FY10 and INR 37 for FY11. The stock is currently trading at 2.6x FY11E book and 17.9x earnings (excluding life insurance) and our SOTP fair value stands at INR 822. We maintain ‘BUY’ recommendation. On relative return basis, the stock is rated ‘Sector Performer’.

To read the full report: KOTAK MAHINDRA BANK