Kotak Mahindra Bank rating: Buy — Conservative lending in the face of odds

By: |
Published: August 1, 2020 4:40 AM

Fall in moratorium loans encouraging; while FY21e earnings may be weaker, asset quality is likely to hold up; ‘Buy’ maintained

Bank has accelerated downgrade of some stressed cases to NPLs which lifted NPLs by 12% q-o-q to 2.7% of loans. NPL coverage is at 68%.Bank has accelerated downgrade of some stressed cases to NPLs which lifted NPLs by 12% q-o-q to 2.7% of loans. NPL coverage is at 68%.

For Q1FY21, Kotak Bank reported profit of Rs 12.4 bn, down 9% y-o-y but above estimates with better fees and lower costs. Fall in moratorium loans from 26% last time to 9.7% is encouraging; bank accelerated NPL recognition & has contingent provisions of 0.6%. Management remains conservative on lending (loans down 2% y-o-y) and stays tentative on opportunity to grab share in loans despite scale-up of Casa to 57% of deposits. Clarity on CEO extension is key. Buy stays.

Encouraging decline in moratorium loans: Management clarified that 80% of moratorium loans are secured and hence even in case of slippages, the loss-given-default should be manageable. Key would be to see the normalisation of collections from loans that exited Phase 1 moratorium. Bank has accelerated downgrade of some stressed cases to NPLs which lifted NPLs by 12% q-o-q to 2.7% of loans. NPL coverage is at 68%.

Holding tight on new lending despite stronger Casa: Management has maintained conservative stance on loan growth given the uncertainties; not only is the current trend weak with a 2% y-o-y decline (vs. sector growth of 6%), but it may stay weaker in near-medium term. On the Casa side, scale-up has been strong with 26% y-o-y growth to 57% of deposits, and with recent cuts to savings deposit rates, we see some upsides to margins that will aid NII growth (down 22 bps q-o-q in Q1).

As highlighted earlier, bank hasn’t fully leveraged improvement in deposit franchise/lower funding-cost to gain share in high quality corporate lending. Fees were down 33% y-o-y, still better than expected, and opex was down 10% y-o-y; unlike peers, Kotak Bank didn’t book treasury gains. Consolidated profit of Rs 18.5 bn was down 4% y-o-y and 49% higher than standalone profit.

Buy stays: We see weaker earnings growth in FY21 reflecting higher credit costs and weaker topline, but overall asset quality should hold up given conservative approach to lending. We maintain Buy with SOTP-based TP of Rs 1,570, including value of bank at 3.6x Jun-22 adjusted PB.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Companies post worst profit decline in a decade, but market analysts are happy about it
2ICICI Bank closes QIP after raising Rs 15,000 crore; sells shares at 1.9% premium to floor price
3How new-age banking solution geared with AI can help make wise investment decisions