Revenues were weak in the lending businesses as KMB maintained a cautious stance. Credit stress spiked as a lumpy mid-corporate account turned into an NPA.
Operating costs were well controlled. Non-lending businesses showed an uptick in performance. The management is confident of an improving trajectory both on credit quality and loan growth. We lower our estimates, building in lower growth and higher credit costs. We roll forward valuations by a quarter. Our updated price target is R763. Maintain overweight.
NII growth in the bank as well the auto finance business (KMP) was weak (11% y-o-y; -1%q-o-q) as Kotak maintained its cautious credit stance (loans grew 6% y-o-y). Only small business & personal loans (39% y-o-y) and agri (23% y-o-y) segments saw strong growth. Growth in all other segments was below 15% y-o-y. The CV/CE book shrank 26% y-o-y. Fee growth in these businesses was also muted.
Credit quality stress (net NPAs up R110 crore q-o-q) was primarily due to a large mid-corporate account (R70 crore) in the real estate sector turning NPA. Operating costs were tightly controlled, particularly in the non-lending businesses. Cost growth in the bank moderated (13% y-o-y), but the pace of branch expansion remained steady (31 branches added in 3QFY14; 25 branches per quarter have been added in the past eight quarters).