Q4FY16 highlights that asset quality remains rock-solid, but PPOP performance has lagged behind high market expectations, largely due to weaker fee growth. While strategically we do not see much negatives for Kotak Bank (except for core fees), we believe expectations are running too high on revenue growth, leading to an earnings downgrade (over 2HFY16, we have cut our earnings by 7-8%). Kotak has outperformed the Bankex index by 15% since September 2015, but with multiples at 21.3x March 18F earnings, current risk-reward is not that attractive, in our view. Hence, we downgrade to neutral. We prefer HDFCB/IIB (Buys) on a relative basis (15-17x March 18F earnings).
ING’s integration appears to be going fine, with good SA pick-up in the integrated platform, and growth of 15% in the past 9 months of integration indicating good asset-side momentum as well.
We expect 48% EPS CAGR over FY16-18F, and Kotak already trades at 22x FY18F EPS. Our assumptions are better than management guidance on most metrics- loan growth of 25%, vs 20% guided; cost income down to 47% by FY18F, from 57% now; and credit costs of 35bps, vs 45-50bps guided.
We lower our FY17F/18F lending business estimates by 3% due to slower fee growth (cumulative cut by 7% in 2HFY16F), but increase our TP to `800 as we roll over to March 18F book.