1. ‘Neutral’ rating on Kotak Mahindra Bank: Street beater

‘Neutral’ rating on Kotak Mahindra Bank: Street beater

Risks from ING Vysya consolidation fairly low now.

By: | Published: May 11, 2015 12:05 AM

Strong beat in Q4: Q4FY15 profit after tax of Rs 9.1 bn (+38% year-on-year) was better than expected with a beat on both lending and capital market businesses. For the lending business, not only is the revenue momentum picking up but also some of the fundamental metrics like CASA (current account savings account) and fee intensity performance is better than expected, and with buoyant capital markets we are finally seeing capital market profitability improving. We have nothing much to complain about; our only constraint remains rich valuations (3.4x FY17 book). Thus we maintain our Neutral rating.

Consistency in lending business continues: (i) Loan growth (24% y-o-y) is picking up with strong growth in corporate book and improving trends in cars/CVs. (ii) As guided, core fee growth at +40% in FY15 continues to outpace balance sheet growth. While corporate growth is lower NIMs (net interest margins), Kotak is increasingly mining more fee/CA opportunities with corporate clients. (iii) Opex (operating expense) growth pick-up to +30% is more ING-integration linked, which will continue into FY16F (forecast) but will likely taper off after that. (iv) Liability momentum improved significantly with average CASA growth of 30% y-o-y, especially on CA deposits where system level growth still remains weak.



Capital market businesses contributing now: PAT of capital market subsidiaries increased by +100% y-o-y to R1.8 bn, leading to highest ever contribution of the capital market business in the last four years (20% of consolidated earnings). While market buoyancy can impact future profitability, Kotak increased its share in equities in FY15 vs FY14.


Valuation remains rich: We increase our consolidated PAT by 3/4% for FY16/17F driven by better fees in lending business and higher profitability of capital market businesses. Thus, we increase our TP (target price) to R1,500 implying 3.7x FY17F book for Kotak’s lending business—similar to our HDFC Bank multiple. We now expect earnings CAGR of 33% over FY15-17F and risks from the ING Vysya consolidation looks fairly low now.

Takeaways from management call

Loan growth

Overall loan growth inched up to 24% y-o-y with a pick up in retail growth (ex- CVs) at 18% y-o-y. In the retail book, car loan growth has inched up to 11% y-o-y with OEM (original equipment manufacturer) volumes picking up, and home loan growth also picked up to 20% y-o-y (from 14% in Q3FY15).

While CV (commercial vehicles) book still shows a y-o-y contraction, there was a 4% q-o-q growth in the CV book mirroring trends seen for other banks in their CV book.

Corporate growth remained very strong at 42% y-o-y growth. A large part of the growth in FY15 in corporate book was to large corporate mostly to +A rated companies and risk weight intensity, as per the management, has dropped. While corporate book is relatively a low margin business, the management indicated that this growth has translated into strong FX fees, debt capital market opportunities and higher CA balances for Kotak.

Kotak has guided for 20% loan growth for the merged entity for FY16F. The bank still remains cautious on tractors/LCVs/CE (light commercial vehicles/construction equipment) but indicated some improvement in MHCV (medium and heavy commercial vehicle) portfolio. Given the improving trends in retail credit on a system level, we see 20% growth guidance as conservative and factor in 23% loan growth for FY16F.

Fee growth

Core fee grew by +40% y-o-y and most of it is granular in nature. Non-interest income grow in Q4FY15 was also aided by R1.6 bn of treasury income and R1.2 bn of gains on stressed asset portfolio.

Mutual fund and life insurance fee momentum was strong as seen for most other banks as well.

MF fees contributed R0.75 bn of the R3.8 bn core fees in Q4FY15 and will likely see volatility linked to market buoyancy.

Kotak has been running below potential on the corporate fee side and the management indicated that a large part of the core fee growth momentum was led by corporate fees, especially from debt capital markets and FX/trade linked.


NIMs at 4.7% was relatively steady despite strong growth in low margin corporate book as CASA momentum picked up in H2FY15, especially in Q4FY15. SA (savings account) accretion: Added 240K customers.

While Q4FY15 CASA accretion does have the impact of some lumpy year-end balances, Kotak reported ~30% growth in daily average CA and +30% growth in daily average SA and that aided margins in spite of an adverse loan mix change.


Gross NPA was flat sequentially in Q4FY15.

nCredit costs guidance of 30-40bps for Kotak’s current business vs 40bps in FY15 indicates stability even on transition. As of now, Kotak is not seeing any deviation on asset quality for ING Vysya vs what it had seen in its due diligence. Hence, the management expects no large positive/negative surprise on that front.

ING Vysya integration

All branches have been rebranded and all employees have been transferred to Kotak Bank, including the unionised staff.

Treasury and support functions were integrated from day one. Whole banking fully integrated at end of April (first first month of merger). Customer assets and liabilities have been carved out and will be integrated over the next 6-12 months.

Total integration cost is R2.0-2.25 bn, of which R0.5 bn has been absorbed in Q4FY15, which led to the increase in opex growth. Kotak will likely expense the rest of R0.5 bn in FY16F. We expect full integration in the next 12 months.


PAT of capital market subsidiaries increased by +100% y-o-y to R1.8 bn leading to higher ever contribution of capital market business in the last four years (20% of consolidated earnings)

Kotak investments PAT up 250% y-o-y: The loan book increase was largely due to incremental lending to commercial real estate and capital market business.

Equities/IB also reported a +1005 y-o-y growth in PAT: While future profitability will be linked to overall market buoyancy, Kotak maintained its leadership and increased market share in FY15 vs FY14.

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