Operating performance in line; loan growth under pressure: Asset quality deteriorated slightly led by the secured retail segment , KMB reported an in-line operating performance, though lower provisions v/s our estimate led to standalone PAT growth of 32% YoY (5% beat). Consolidated PAT declined by 3% YoY on account of weaker performance from subsidiaries, mainly Kotak Life and Kotak Prime. Loan book fell ~3% QoQ (up 6.6% YoY) to ~Rs 2.2trillion, led by a decline across most segments. On the liability front, CASA growth remains steady, driving CASA mix to 60.2% (highest in the industry). On the asset quality front, slippages stood elevated at Rs 15billion (annualised 2.8% of loans) mainly from tractors, CV/CE, and the small commercial segment. GNPA/NNPA ratio rose by 31bp/7bp QoQ to 3.56%/1.28%. The bank carries Covid-related provisions of Rs 12.8billion (0.6% of advances), which remains unchanged. We maintain our neutral rating.

Asset quality deteriorates marginally: KMB reported a standalone PAT of Rs 16.4billion (32% YoY; 5% beat), led by a 21% QoQ decline in provisions. Consolidated PAT fell ~3% YoY to Rs 18.1billion as a couple of subsidiaries reported subdued performance. Kotak Life reported a loss of Rs 2.4billion. Kotak Prime’s PAT declined by 57% QoQ (up 16% YoY) to Rs 790million. NII grew 6% YoY to Rs 39.4billion (broadly in line), affected by subdued loan growth, while NIM improved 21bp QoQ to 4.6% as the last quarter had a one-off interest relief refund (12bp impact in 4QFY21). Other income grew 105% YoY (above our estimate) supported by a lower base of last year, while fee income rose 51%. Opex grew ~28% YoY. C/I ratio rose to 43.5% (v/s 41.2% in 4QFY21), resulting in a PPOP growth of 19% YoY (in line). Loan book fell ~3% QoQ (up 6.6% YoY) to ~Rs 2.2trillion, led by a decline across most segments, with a 5% QoQ dip in CV/CE, 6% decline in Agri, and a 4% drop in the Corporate Banking portfolio. Till 1QFY22, the bank has disbursed Rs 119billion under the ECLGS scheme. Deposits grew 9.6% YoY to ~Rs 2.9trillion. CASA deposits grew ~16% YoY.

The CASA mix stood at 60.2% – the highest in the industry. CASA + TDs (below INR50m) mix increased to ~92% of total deposits. Asset quality deteriorated, with GNPA/NNPA ratio increasing by 31bp/7bp QoQ to 3.56%/1.28%. Total slippages stood elevated at INR15b (annualized 2.8% of loans) mainly in Commercial Vehicles, Tractors, Construction Equipment, etc. PCR stood stable at 64.8% (v/s 63.6% in FY21), but was lower v/s other larger peers. SMA-2 book increased to INR4.3b (v/s INR1.1b in FY21). Total restructuring stood at INR5.5b (0.25% of advances) v/s INR4.35b in FY21. The bank carries total COVID-related provisions of INR12.8b (~0.6% of loans) and has not drawn anything during 1QFY22.

Valuation and view: KMB reported an in line core operating performance in a challenging environment, despite muted loan growth across most segments. The bank continues to report steady progress in building a strong liability franchise, with a CASA ratio of ~60% (highest in the industry). Asset quality was affected due to the second COVID wave, which hampered collections, thus driving elevated slippages. The restructured book remains under control ~0.25% of loans. The bank carries COVID-related provisions of INR12.8b (0.6% of advances). We estimate a credit cost of 1.1% for FY22E (v/s 1.3% in FY21). We maintain our earnings estimate for FY22E/FY23E. We maintain our Neutral stance with a TP to INR1,900/share (3.5x FY23E ABV + INR560 for subsidiaries).