Analyst Corner| KMB: Maintain ‘buy’ as bank continues to see improvement

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January 27, 2021 8:01 AM

For 3QFY21, KOTAKB’S profit of Rs 18.5bn, up 16%YOY, was below estimate due to higher credit costs. High slippages & rise in SMA2 loans were disappointing- coupled with interest-reversal, this pushed up credit cost. We are encouraged to see 22% rise in Casa to 59% of deposit and improved lending appetite & demand (loans up […]

maintain but, Kotak Bank, KMB bank asset quality, SME working capital and secured retail (mortgages), kotak mahindra bank casa strength Kotak Bank continues to see improvement in deposit franchise with 22% growth in Casa deposits to an industry-leading level of 59% of deposits

For 3QFY21, KOTAKB’S profit of Rs 18.5bn, up 16%YOY, was below estimate due to higher credit costs. High slippages & rise in SMA2 loans were disappointing- coupled with interest-reversal, this pushed up credit cost. We are encouraged to see 22% rise in Casa to 59% of deposit and improved lending appetite & demand (loans up 5% QoQ ). While we watch out for asset quality, we believe improved lending is a better barometer of mgt.’s risk assessment. MaintainBuy.

Higher slippages from unsecured loans a tad disappointing. Kotak bank saw relatively higher slippages during 3Q, mostly emanating from unsecured loans. Slippages rose by 88% YoY (including standstill loans) and this lifted proforma gross NPLs to 3.3% of loans-highest since 1QFY11. Even SMA-2 loans rose from 0.06% of loans in 2Qto 0.3% in 3Q .At the same time, the extent of restructuring was low at 0.3% of loans and management reiterated that the quality of ECLG loans/borrowers (4.4% of loans; linked to+20% of loans) is good and hence should not show weak credit experience. NPL coverage ratio (post standstill) at 63% seems lower, but the bank’s contingent provisions at 0.6% of loans and26% of gross NPLs seem sufficient. During 3Q, credit costs rose to 1.2% of avg. loans (incl. reversal of interest income)& was a key driver of the earnings miss.

Casa strength and uptick in economy driving loan growth. Kotak Bank continues to see improvement in deposit franchise with 22% growth in Casa deposits to an industry-leading level of 59% of deposits. Even the cost of savings deposits has declined to 3.8% from 5.2% in March. This along with management’s view of the improving economy (and implicit view on asset quality) reflects an uptick in loan growth to 5% QoQ(-1%YoY). We believe that growth can continue to improve and a fall in funding costs will help. Mortgage loans are a key segment of lending and bank also highlighted near normalcy in disbursements in segments like corporate, SME working capital and secured retail (mortgages). Inline operating profit of bank & mixed-bag for subs. Operating profits rose by 29%YoY and even adjusted for income reversal it rose by 22%. Assets grew by 20% YoY with investments growing faster vs. loans, reflecting management’s conservative stance over the past few quarters.

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