Kotak Mahindra Bank
KMB’s Q3FY15 consolidated PAT missed our estimate by 6%. While banking business’ profits were in line, aided by strong loan (+22% y-o-y) and fees (+45% y-o-y in Q3/9M) growth, continued competitive pressure on other businesses (R2.5 bn, flat y-o-y) impacted overall profitability (vs estimate of R3 bn).
Banking business: Standalone profit after tax grew 37% year-on-year (on a lower base) to Rs4.65 bn (in-line). Strong total income growth (+28% y-o-y ) was driven by healthy fees (+45% y-o-y) and higher trading gains (+123% y-o-y ). Share of CV/CE (commercial vehicle/construction equipment) loans (-16% y-o-y) in overall loans is down to an all-time low of 7.8%. Loan growth (ex-CV) remains healthy at 27% y-o-y driven by unsecured retail loans (9% of loans, +38% y-o-y) and corporate banking (34% of loans, +33% y-o-y). Reported CASA (current account, savings account) ratio up 100bp quarter-on-quarter to 32% led by continued traction in CA (+13% q-o-q) and SA (+6%).
Other highlights: (i) K-Sec market share improved 10bp q-o-q to 2.8%, (ii) car loan disbursements grew 25% y-o-y to R18.9 bn, though vehicle (ex-CV) loans were up just 13% y-o-y driven by higher repayments, (iii) domestic AMC AUM (asset management company’s asset under management) increased 5% q-o-q to R364 bn but reported a loss of R100m (higher distribution commission, in-line with competition) and (iv) consolidated NIM (net interest margin) was down 30bp q-o-q to 4.7%.
Valuation and view: Merger with VYSB (Vysya Bank) places KMB in a sweet spot, with strong presence across geographies, products and continued healthy capitalisation (CET 1—common equity tier 1—of 16.5%). The merged entity will be the fourth-largest private sector bank with a loan book of R1.2t and market share of 1.8% of loans. KMB’s premium multiples are likely to sustain considering the strong growth and operating leverage available across businesses. While we are positive on the business, valuations at 3.3x/23x consolidated BV/EPS (book value/earnings per share) limit the upside. Maintain Neutral with an SOTP(sum-of-the-parts)-based target price of R1,325 (pro-forma merged VYSB).
Lending Business: Strong growth in corporate banking and unsecured loans; NIM softened q-o-q to 4.7%; stable asset quality.
Profitability of the banking business was in-line with estimates with PAT of R4.65 bn (+37% y-o-y and +4% q-o-q). PAT of lending business increased 28% y-o-y to R6.1 bn (largely in-line).
Kotak Prime PAT declined 2% y-o-y and 4% q-o-q to R1.2 bn. On a lower base, Kotak Mahindra Investments PAT grew 118% y-o-y to R240m.
Standalone Bank: NIM declined 30bp q-o-q to 4.7% as loan mix shifted towards relatively lower yielding corporate loans. Strong growth was witnessed in unsecured retail loans (+38% y-o-y ) and corporate banking (+33% y-o-y). Fees grew strongly at 45% y-o-y helped by strong distribution related fees. Further, higher treasury (+123% y-o-y ) led to overall non-interest income being 5% higher than estimate at R4.9 bn.
Opex was largely inline (+30% y-o-y and +6% q-o-q ). R560m write-back of provisions on investment book led to provisions 37% lower than estimate. Credit cost remained stable q-o-q at ~0.5% (annualised).
Stable asset quality; NSL (net stressed loan) one of the lowest among peers: GNPA (gross-non-performing assets) increased 6% q-o-q and in percentage terms stood at 1.9% (flat q-o-q). NNPA% (net NPA) also remained flat q-o-q at 1%. PCR (provision coverage ratio) improved marginally to 48.4% as compared to 47.5% in Q2FY15. Restructured loans were stable q-o-q at 25 bp loans. NSL (1.2% of loans) remains one of the lowest amongst peers.
Traction in CASA continues: SA deposits grew 6% q-o-q and 36% y-o-y and new SA customer addition per quarter remains healthy at 0.2m. SA deposits as a proportion of overall deposits stood at 17% (stable q-o-q). CA deposits are up 13% q-o-q (+50% y-o-y ). CASA (excluding float) grew 42% y-o-y (+9% q-o-q ). Reported CASA ratio improved 100bp q-o-q to 32% over Q2 and 30% y-o-y. KMB further reduced its reliance on CDs (current deposits) which formed 7% of overall deposits as compared to 10% in FY14 and peak of 21.5% at end of Q3FY13. CASA and TDs (term deposits) below R10m constitute 65% of total deposits (64% in 3QFY14).
Consolidated ex-CV loan growth at 25% y-o-y: CV loan portfolio declined 1% q-o-q and 16% y-o-y dragging overall loan growth to 21% y-o-y (+6% q-o-q ). CV loans as a proportion of overall loans now formed 5.8% as compared to 6.2% in previous quarter and 8.5% a year ago. Growth in home loans (+7% q-o-q and 20% y-o-y) was also healthy. Car loans (Prime) is slowly gaining traction (+9% y-o-y and 2% q-o-q).
Weak quarter for non-lending businesses
*Capital market related business PAT was at R540m (26% below expectation) driven by R60m loss in the investment banking arm. K-sec net profit declined 9% q-o-q to R600m (+30% y-o-y) .
*Asset management business reported PAT of R60m vs. R160m in Q2FY15 and R280m in Q3FY14.
*Overall AUM increased 9% q-o-q to R714 bn. Within which domestic AUM increased 5% y-o-y led by 21% q-o-q growth in Equity AUM.
*Life insurance profit declined 15% y-o-y and 2% q-o-q to R 510m.