Kotak Mahindra Bank's Q1FY20 results (Outperformer) - Loan growth moderates but asset quality and NIMs intact

Q1FY20 result highlights

• KMB’s PAT of Rs13.6bn grew 33% yoy but declined 3% qoq and was slightly below our estimate of Rs13.7bn. While PPOP (18% yoy and 5% qoq) was better than our estimate, the bank made MTM provisions of Rs0.3bn, hence the lower PAT. While loan growth was strong at 18% yoy it moderated from 21% in 4Q. NIMs remain strong at 4.49%, similar to 4Q and higher by 19bps yoy. NIMs were supported by change in loan mix towards higher yielding assets and higher yoy CASA. Asset quality remains strong with the sequential rise in GNPAs contained at 3%.
• Loan growth moderated but still remained stronger than the sector at 18% yoy. The bank has clubbed / regrouped corporate and business banking/SME. Growth in the merged piece was weak at 15% yoy while all other segments – CVs, mortgages, agri and personal loans saw 20% plus growth. Mgmt explained that growth in the corporate segment looks subdued due to run-down of DCM-related loans, adjusted for which it was higher.
• NIM remained stable qoq at 4.49%, even on a high base, supported by change in mix towards higher yielding loans. The bank acquired market share from the absence of NBFCs at better yields. The CASA ratio improved yoy from 50.3% to 50.7% however fell qoq from 52.5%. The qoq decline was on account of a decline in current deposits by 6%. Savings deposits grew 22% yoy and 2% qoq. NII grew 23% yoy and 4% qoq.
• Asset quality remained stable with GNPAs growing 3% qoq to 2.19%. The bank made investment depreciation provisions of Rs298m on corporate bonds. PCR improved 152bp QoQ to 67%. SMA-2 advances at Rs3.32b were 16bp of loans vs 7bp in 4QFY19. Core fees grew 16% yoy while miscellaneous income declined 12% yoy.
• Among lending subsidiaries, the performance of Kotak Prime remains subdued with car loans declining 3% yoy and overall loans flat   yoy. PAT of Kotak Prime grew 10% yoy but declined 7% qoq. Kotak Mahindra Investments mainly into structured finance grew customer assets by 17% yoy and PAT by 31%. NPLs of Kotak Mahindra Investments have been rising but management believes they are fully recoverable. Amongst non-lending subs, KMCC and AMC reported 80%/43% YoY PAT growth while Kotak securities reported 15% YoY decline. PAT for Kotak Insurance grew 15% yoy. Consolidated loans grew 15% yoy while consolidated PAT grew 23%.

Valuation and view

KMB results were better than most other private banks in terms of growth, NIMs and asset quality. Mgmt remains confident of standalone loan growth of 20% and stable asset quality. We believe loan growth remains a key monitorable for Kotak, like for other private banks, given the tough macro with a slowdown in corporate and consumer demand. 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. We maintain Outperformer.  However, we note that given the valuation premium KMB commands over other private banks, a miss on loan growth in the quarters ahead would be viewed negatively.