Kotak Mahindra Bank's Q4FY19 results (Outperformer) - A strong quarter

Q4FY19 result highlights

• KMB’s PAT of Rs14.1bn grew 25% yoy and 9% qoq, 5% higher than our estimate. Core earnings were strong with qoq NIM expansion, higher qoq CASA (the only large bank to have seen a CASA expansion), strong loan growth and lower credit cost. Performance of the asset management and life insurance subsidiaries was strong while performance of securities, investment banking and Kotak Prime was muted.
• Loan growth remained strong at 21% yoy and 5% qoq. Except business banking, all segments grew strongly with CV/CE at 30% yoy / 9% qoq growing the fastest, followed by mortgages at 26% yoy / 6% qoq. Corporate loans grew 17% yoy. 
• NIM expanded for a second consecutive quarter by 15bps qoq to 4.48%. Repricing of MCLR-linked loans and good CASA growth were the key drivers of NIM expansion. Unlike other banks, Kotak saw a sharp increase of 9% qoq and 21% yoy in CASA deposits led by current accounts that grew 21% yoy and 23% qoq. Growth in savings was also healthy at 22% yoy and 4% qoq. The CASA ratio improved to 52.5% from 50.7% qoq. NII grew 18% yoy and 4% qoq.
• Asset quality remained stable. GNPAs rose 8% qoq, while SMA2 loans declined sharply.  Total stress loans rose marginally by 3% qoq to 2.21%.
• Core fees grew strongly 18% yoy and 14% qoq while miscellaneous income declined 41% yoy.
• Among subsidiaries, the performance of life insurance is commendable. The life insurance business saw a huge VNB margin expansion from 29% to 37%. Kotak now has the highest VNB margin in the sector.  IEV grew 25% from Rs58bn to Rs70bn yoy and VNB increased by 53% yoy. The margin expansion was driven by a higher share of credit protect business sourced from the bank. The company also booked huge MTM gains on the non-par portfolio. Kotak’s VNB margin is now the best in the sector and much higher than that of HDFC  Life. As such it could be assigned a multiple higher than other insurers. But that could happen only after more disclosures including the EV walk.

Valuation and view

We remain Overweight on the stock. There are only a few banks with high standards of corporate governance, excellent risk management 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 seven quarters addressing investor concerns on slower-than-sector growth. Kotak does not have any material exposure to the new stress loans that have surfaced for the sector in the last 6 months – ADAG, Essel, Suzlon, Jet, Omkar, Supertech and other weak NBFCs. We increase our TP marginally to Rs.1525 (from Rs1500) with higher value for life insurance.