Monday, March 26, 2012


 Continued growth in loan book: With an established franchise in retail lending and an improving presence in corporate lending, we expect KMB to deliver healthy 29% CAGR in loan growth over FY11-FY14 (FY07-FY11 CAGR is 28%).

 NIMs to remain stable: Whilst a growing proportion of lower yield wholesale loans in KMB’s portfolio (40% by FY14E from 32% in 3QFY12) will decrease the bank’s blended yield, a decrease in the cost of funds (due to a higher proportion of CASA deposits going forward and lower wholesale funding costs) will ensure that NIMs remain stable at ~5.1% over FY12-FY14 (~5.1% in FY12YTD on a calculated basis).

 Lower exposure to credit quality risk: With negligible exposure to stressed sectors such as Power, Telecom, Infra, Aviation and Textiles (0.9% of total net worth) and gross NPAs of 1.1%, we believe that KMB is one of the best placed banks in India in terms of asset quality.

 Well capitalised balance sheet: With a tier 1 capital ratio of ~16%, Kotak is amongst the best capitalised banks in India. This not only offers the bank an opportunity to acquire businesses for inorganic growth, it also provides enough headroom for the company to leverage its balance sheet and expand its RoE.

 Fee income to increase sharply: We believe the worst is over for the capital market businesses and we expect capital market related fee income to increase sharply from hereon at 26% CAGR between FY12-FY14 with recovery of the markets (negative CAGR of 22% between FY08-FY11).

Valuation: Our SOTP valuation of the company is `609 (for FY13E, implied consolidated P/B of 3.0x and consolidated P/E of 19.1x), implying 7% upside from current levels. However, if the overall economy improves going forward, the stock could provide significant returns due to higher valuation for both lending and capital market businesses.

To read full report: KOTAK MAHINDRA BANK                  
To read other reports: SWOT ANALYSIS ON BANKING INDUSTRY