Kotak Mahindra Bank's Q2FY20 results (Outperformer) - Loan growth continues to moderate

Q2FY20 result highlights

• KMB’s PAT of Rs17bn was ahead of the consensus estimate on lower tax and higher NIM. PAT grew 51% yoy and 26% qoq. While loan growth moderated to 15% (18% in 1Q and 21% in 4Q), NIM improved to 4.61% from 4.5% qoq and 4.2% yoy. Asset quality remained sound. While GNPAs rose 9% qoq they remain low at 2.3% of loans.
• Loan growth moderated to 15%. Growth in corporate and business banking slowed further to 7.5% yoy compared to 15% in 1Q while CV growth also decelerated to 15% (20% in 1Q). All other segments grew 20% plus.
• The CRE exposure has grown by Rs12bn sequentially but the new exposure is to A-category builders.
• NIM improved 12 bps qoq to 4.61% on an already high base led by higher CASA. CASA improved to 53.6% from 50.7% qoq. NII grew 25% yoy and 5% qoq. Average CA has grown 22% YTD while average SA has grown 20%. Cost of SA has declined from 5.67% to 5.35% yoy in 2QFY20.
• Asset quality remained stable. While GNPAs rose 9% qoq, the proportion remains low at 2.3% of loans. Slippage rose to Rs10bn from Rs8bn qoq with one lumpy account of Rs1bn. Unsecured retail including credit cards and personal loans is seeing some increase in stress while secured retail continues to be stable.
• MTM provisions declined qoq. PCR remained strong at 64% though lower than 67% qoq. SMA-2 loans remain low at 20bps. Core fees grew 14% yoy / flat qoq while miscellaneous income declined.
• Among lending subsidiaries, the performance of Kotak Prime remains subdued with car loans declining 8% yoy and overall loans 4%   yoy. PAT of Kotak Prime grew 9% yoy. Kotak Mahindra Investments mainly into structured finance grew PAT by 48%. NPLs of Kotak Mahindra Investments have been rising but management believes they are fully recoverable. Amongst non-lending subs, KMCC’s PAT declined sharply with PAT of only Rs10M and AMC reported 13% YoY PAT growth while Kotak securities reported 30% YoY growth in PAT. PAT for Kotak Insurance grew 13% yoy. Consolidated loans grew 12% yoy while consolidated PAT grew 37%.
• Guidance: Management guided to: 1) Loan growth in the mid-teens for FY20 against the earlier guidance of close to 20% 2) NIMs above 4.3% 3) Marginally higher credit cost at 60bp.

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. We review earnings to account for lower tax and raise TP to Rs1,760.