Kotak Mahindra Bank's Q3FY19 results (Outperformer) - Strong operating performance; NIM expansion is the key positive.

Q3FY19 result highlights

• KMB reported a strong quarter with PAT of Rs13bn higher than the consensus estimate of Rs12bn due to higher NIM. PAT grew 23% yoy and 13% qoq. Unadjusted operating profit growth was weak because provisioning write back on investments is adjusted through provisions, below the PPOP. Adjusted PPOP grew strongly at 23% yoy and 11% qoq.
• Loan growth remained strong at 23.5% yoy and 6.2% qoq. All segments of retail lending except business banking grew strongly with CVs at 36% yoy and 6% qoq, personal loans at 36% yoy and 7% qoq and housing at 24% yoy and 6% qoq. Growth in business banking remained flat yoy as the bank is cautious on this segment on concerns of overvaluation of collateral as explained in the 1Q earnings call. Growth in corporate loans was strong at 26% yoy and 8.4% qoq.
• NIM at 4.33% expanded 13bp qoq and yoy and was the key positive highlight, driven by better pricing power and continuous improvement in CASA. There was no lumpy element in NII. CASA deposits grew 28% yoy and 5% qoq. Savings deposits grew strongly at 31% yoy and 6% qoq. NII grew 23% yoy and 9% qoq.
• Core fees grew 25% yoy and 2% qoq.
• Asset quality remained stable. GNPAs rose 2% qoq while net NPAs declined 7% qoq. Slippage declined to Rs3.5bn from Rs4.2bn qoq.  Credit cost rose marginally to 53bp versus 49bp qoq. The bank had an investment write-back of Rs2.9bn.
• While growth at the core bank was strong, growth in subsidiaries was weak. PAT of subsidiaries declined 7% and declined marginally qoq. Other than life insurance and asset management, all subsidiaries showed a decline in profit. Kotak Prime and Kotak Investments showed a decline in loan growth and profitability. The decline in profitability was on account of higher than normalized liquidity buffer in view of the liquidity crisis which had a negative carry. 

Valuation and view

We remain Overweight on the stock. There are only a few banks with high standards of corporate governance, excellent risk management practices and superior asset quality and Kotak is one of them. After volatility in loan growth post ING, Kotak has been consistently delivering strong loan and CASA growth over the last six quarters addressing investor concerns on slower-than-sector growth. The next hearing on promoter stake dilution at the Bombay High Court is March 12. Stake dilution will remain an overhang till the final court order.