1. Kotak Mahindra Bank CASA surprises, says Jefferies, pegs PT at Rs 930

Kotak Mahindra Bank CASA surprises, says Jefferies, pegs PT at Rs 930

Rebound in NIM, better loan growth led to bottom line vs. JEFe. Core-PPOP beat at consol-ex insurance & bank (17% & 10% vs. JEFe).

By: | New Delhi | Published: April 29, 2017 4:05 AM
Loan growth accelerated to 15.4% (consol) and 14.7% (standalone) – guidance of 20% in FY18E. (Reuters)

Rebound in NIM, better loan growth led to bottom line vs. JEFe. Core-PPOP beat at consol-ex insurance & bank (17% & 10% vs. JEFe). Loan growth accelerated to 15.4% (consol) and 14.7% (standalone) – guidance of 20% in FY18E. Asset quality worsened marginally as ex-IVBL was recognised as NPL. Raise our earnings post a stronger quarter, rollover earnings to Mar’18 for a PT of Rs 930.

Loan growth improves, CASA surprises. Bank loan growth accelerated to 14.7% y-o-y from 12.1% y-o-y in Q3FY17, bolstered by CV/CE (~8% share, +~45% y-o-y) & corporate (~31% share, +~19% y-o-y) while business banking (~13% share) under performed. Consol book grew 15.4% y-o-y. CASA ratio improved to 44% from 42.0% in Q3FY17. Savings deposit growth continues to be very strong and current deposit was helped by IPOs floats.

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Fee drove core PPOP improvement. Consol fee grew 36.9% y-o-y driven by strong performance of mutual fund & life insurance sales. Overall, non-interest income grew 65.8% y-o-y, boosted by strong positive swing in investment gains related to insurance.

Core fee income in the banking entity grew 24.1% y-o-y. For the banking entity, GNPL inched up 17bp q-o-q to 2.59%. Total stressed loans (NNPL + standard restructured) increased q-o-q both for the bank (2.67% vs. 2.54%) and consol (1.15% versus 1.01%). The slippage ratio at consolidated level was 1.7% in Q4 and 1.33% for FY17 as the bank recognised ex-IVBL stressed assets as NPLs.
Change in estimates. We increase consolidated estimates by 2% and 4.3% for FY18/19E respectively on the back of better fee income and small upgrade to NIM while keeping credit costs flat at 49bps.

We also increase standalone (bank) estimates by 9.8% and 12% for FY18/19E driven largely by lower expense ratio offsetting a marginally lower NIM while forecasting a flat credit cost of 44bps.
We are not as sanguine as management. (20% forecast) on loan growth in FY18E (GST impact) and bake in ~17%/16% on standalone/consol estimates. This results in an EPS CAGR of 19% (consolidated) and 20.8% (standalone) over FY17-20E. We expect consolidated RoA/RoE to be 2%/15.3% by FY20E.

KMB trades at 4.5x Mar’17 adj. BV and 29.8x EPS Mar’18E. At our PT of Rs 930 (roll fwd by a qtr), we value KMB at 4x Mar’18E adj. BV and 25.2x EPS Mar’19E. This compares to 5-year average of 3.9x BV and 23x EPS. Downside – weaker growth/asset quality, valuation compression. Upside – stronger loan growth, lower credit costs.

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