Kotak Mahindra Bank's Q3FY20 results (Outperformer) - Loan growth decelerates further

Q3FY20 result highlights

• KMB’s PAT of Rs16bn grew 24% yoy but declined 7% qoq. PAT was below the consensus estimate of Rs16.7bn due to higher pension cost of erstwhile ING Vysya Bank and slower fees. Loan growth slowed down significantly, so did fees, while opex grew 21% yoy due to higher pension provisions. However NIM remained strong at 4.69% versus 4.61% qoq. GNPAs rose 8% qoq to 2.46% but the base remains low. Slippage remained stable qoq at Rs10.6bn.
• Loan growth moderated to 10% yoy in 3Q from 15% in 2Q and 18% in 1Q. Growth in corporate banking slowed further to 3% yoy compared to 8% in 2Q while CV growth also decelerated to 6% (16% in 2Q). Growth in mortgages remained strong at 20% yoy and growth in small business/PL/CC was 15% yoy. 
• NIM improved 8bps qoq to 4.69% on an already high base led by higher CASA. CASA improved to 54% from 51% yoy. NII grew 17% yoy and 2% qoq. Cost of SA has declined from 5.67% to 5.27% yoy in 3QFY20.
• While GNPAs rose 8% qoq, the proportion remains low at 2.46% of loans. Slippage remains stable qoq at Rs10.6bn. The largest contributor to slippage was corporate followed by unsecured loans where delinquencies are rising. CV+agri NPLs are higher than normal but have not risen qoq. PCR remained stable qoq at 64.4%. SMA-2 loans declined to 13bps from 20bps in 2Q.
• Core fees growth slowed considerably to 8% yoy from 14% yoy in 2Q.  Pressure on fees comes from lower MF distribution fees. Operating expenses grew sharply by 21% yoy / 15% qoq due to pension obligation of Rs2bn. The pension cost was on account of change in annuity table of LIC effective October 2019. The bank has taken the entire hit from higher annuity rate upfront for 2,000 current and 3,000 retired employees of erstwhile ING. PPOP grew 23% / -5% qoq.
• Among lending subsidiaries, the performance of Kotak Prime remains subdued with car loans declining 11% yoy and overall loans 7% yoy. PAT of Kotak Prime grew 35% yoy. Kotak Mahindra Investments mainly into structured finance grew PAT by 60% yoy. Amongst non-lending subs, KMCC’s PAT rebounded to Rs400m from Rs10m qoq and AMC reported 20% yoy PAT growth while Kotak securities reported 29% yoy growth in PAT. PAT for Kotak Insurance grew 33% yoy. Consolidated loans grew 8% yoy while consolidated PAT grew 27%.

Guidance: Management guided to: 1) Low double digit loan growth (less than mid-teens) for FY20 against the earlier guidance of mid-teens 2) credit cost at 60bps. 3) CEO continues to warn of high sector specific and company specific stress.

Valuation and view

Kotak has managed its asset quality better than any other bank. So unlike for the rest of the sector, asset quality is not a concern here. However, slowing growth remains a key monitorable for KMB given its rich valuation. We maintain Outperformer given the bank’s superior asset quality and high profitability.  A miss on loan growth in the quarters ahead would be viewed negatively.