Stress loans are low & bank has buffer prov. of 0.6%, but NPL buffer adjusted for seasoning has moderated. We cut earnings slightly, pick-up in growth & clarity on succession key to rerating.
Key takeaway: Kotak’s FY21 annual report highlights that retail profit fell by +60% due to higher credit cost & weak topline. Corporate loans shrank, but unlike peers RWA/asset didn’t fall & PSU loans fell. Deposit franchise is strong with high CASA & share of retail deposits. Stress loans are low & bank has buffer prov. of 0.6%, but NPL buffer adjusted for seasoning has moderated. We cut earnings slightly, pick-up in growth & clarity on succession key to rerating.
Retail profit falls +60% on higher credit cost; Casa franchise is strong: In FY21, Kotak Bank saw a sharp 63% YoY fall in retail profit due to higher credit costs and slower topline growth. Retail and agri NPLs rose 170-200bps YoY and retail loans grew 6% YoY led by secured segments like home loans and autos. Credit card additions were muted at 0.1 mn, one third of additions in FY20. Bank’s liability franchise has done well with a) CASA ratio rising to 60% of deposits (FY20 56%) and b) share of retail deposits at 63% of total is better than ICICI and Axis. Deposit client additions were healthy, with c.2.9mn debit cards added in FY21 (2.6mn FY20). Concentration of deposits is low with Top-20 depositors bringing only 10% of deposits and ALM is well balanced.
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Weaker corporate growth; limited de-risking: During FY21, bank consolidated its corporate loan book with 7% decline to 37% of total. We would have expected a tad more derisking from Kotak – but its consolidated RWA/asset ratio was largely flat at 72%, whereas other large banks have seen 300-500bps YoY decline in FY21. This is despite the rise in share of bank/ government guaranteed loans like ECLG to 5% of loans. Kotak’s share of PSU loans has been marginal and this has dropped sharply.
NPLs up, buffer on seasoning adjusted basis moderates: During FY21, slippages rose by 60% YoY and gross NPLs were at 3.3%. NPL coverage was comfortable, but adjusted for seasoning, surplus provision has moderated YoY. The bank has additional provision of 0.6% (of loan book) against stressed loans.