KMB’s third-quarter result mirrored the overall slowdown in the economy, which led to moderation in loan growth and elevated slippage trajectory. Overall operating performance was healthy with PPoP increasing by 23% y-o-y, despite the bank making Rs 2 bn provisions toward pension obligations. We cut our EPS estimate for FY21/22 by 4%/7%, primarily as we factor in lower loan growth assumption. Maintain Neutral.
Loan growth moderates; higher provisions drag earnings
Standalone PAT increased 24% y-o-y to ~Rs 16 bn (4% miss v/s our estimate of Rs 16.6 bn) due to higher provisions of Rs 4.4 bn (our estimate: Rs 3.8 bn). NII grew ~17% y-o-y to Rs 34.3 bn (2% miss), impacted by moderate loan growth; however, margins improved 8bp q-o-q to 4.7%. Opex increased 21% y-o-y to Rs 23.8 bn, led by one-off of Rs 2 bn toward pension obligations. Thus, the C/I ratio came in at 49.9% v/s 45.2% in Q2. Loan book grew ~10% y-o-y to Rs 2.2 trn, reflecting the slowdown in the business banking/corporate banking and CV/CE portfolios. Deposits growth moderated to 12% y-o-y to Rs 2.4 trn. However, CASA grew at ~19% y-o-y (mix thus improved 10bp q-o-q to 53.7%).
Asset quality deteriorated, with GNPL/NNPL increasing by ~8%/6% q-o-q led by a few corporate chunky accounts, unsecured and CV/CE segments. PCR ratio improved 42bp q-o-q to ~64%. KMB’s subsidiaries reported a strong performance, with PAT up 35% y-o-y for Kotak Prime, 29% y-o-y for Kotak Securities and 20% y-o-y for the AMC business.
Highlights from mgmt commentary
Corporate banking slowdown was led by under-utilisation of loan limits by better-rated corporates as they preferred CP markets. Home loan & LAP portfolio is growing well led by lower cost of funds and is getting better risk adjusted returns.
Valuation and view
KMB’s loan growth is moderating due to weaker trends in the corporate banking and CV/CE portfolios. We marginally cut our loan growth assumption and estimate KMB to deliver 14%/24% loan book/PAT CAGR over FY19-22, led by stable margins and a further improvement in operating leverage. We cut our PAT estimate by 4%/7% for FY21/22. We continue believing in KMB’s capability to deliver in a challenging environment and appreciate the progress it is making in building a strong liability franchise. Maintain Neutral with a TP of Rs 1,625 (3.8x Sep21E ABV + Rs 494 for subs) as we roll forward our estimates to Sep’21.