While bank has scaled up liability franchise well with Casa ratio of 60%, it has been rather conservative about growing the large corporate book due to concerns over lower yields.
Key takeaway: Our interactions with mgmt point that (1) growth appetite improved a bit in retail (incl. unsecured) & SME; (2) large corp. lending still not big focus despite bank’s low funding cost; (3) bank is open to inorganic opportunities, preference may be to credit cards, gold, & MFI loans; (4) succession will offer scope to reorg. teams & look at fresh talent — our base case is internal elevation for CEO. Growth uptick & succession will be key to stock returns.
Focus on housing; open to unsecured retail and SME. Kotak Bank is focused on growing housing loans by offering lower rates & leveraging staff-based and DSA channels. Bank also appears comfortable growing unsecured personal loans & credit card book. In SME space, bank has higher exposure to ECLG loans (5.4% of loans), and we are encouraged that quality of the book has held up well so far (till 1Q). Bank also seems open to lend to better-quality SMEs in select sectors.
Despite low funding cost, caution on large corp. lending stays: While bank has scaled up liability franchise well with Casa ratio of 60%, it has been rather conservative about growing the large corporate book due to concerns over lower yields. We see limited changes to that outlook, and even if book starts to grow from here, it may lag the retail piece.
Open to inorganic opportunities where it expands/ deepens business lines: Recently, Kotak group acquired a small vehicle financing arm of Volkswagen India that gave them Rs 13bn of loans (0.5% of consol. loans) and 30k customers. Mgmt. seems open to inorganic opportunities that deepen presence in areas such as credit cards, gold financing, MFI, etc.
Preparing for succession: As the Bank prepares for succession after retirement of Mr. Uday Kotak (Promoter and CEO) and Mr. Dipak Gupta (Jt. MD) in Dec-23, it is taking a holistic view about it.
Mr. Kotak might return as non-executive director for a reasonable term (up to 8yrs) to guide the bank. Bank/ board seem open to choices from inside and outside the bank and to make required changes to the team.
Valuations at slight premium to average; growth key to re-rating: While there is time for succession planning, pickup in growth and clarity on plans will be key to valuation re-rating. We roll over our target price to Rs 2,340 (from Rs 2,100) on 4.3x Sep-23 adjusted PB. Buy call stays.