MOSL: KOTAK MAHINDRA BANK (Downgrade to Neutral)-Positives factored in; downgrading to Neutral on premium valuations

Kotak Mahindra Bank: Positives factored in; downgrading to Neutral on premium valuations

(KMB IN, Mkt Cap USD37.3b, CMP INR1350, TP INR1400, 3% Upside, Downgrade to Neutral)

Standalone results

• 1QFY19 PAT grew ~12% YoY to INR10.2b – 9% miss due to higher provisions (investment provisions of INR2.1b). However, operating profit grew 27.4% YoY to INR20.3b (6% beat), led by 15% YoY NII growth.
• Margins shrank 5bp QoQ to 4.3%, as incremental loan growth was led by corporate, while borrowings increased 70% YoY/33% QoQ. CASA deposits grew 33% YoY, led by 51% YoY growth in SA deposits (SA cost of 5.61%). CASA ratio declined 50bp QoQ to 50.3%.
• GNPLs increased by 1.9% QoQ, but management sounded cautious on the SME/business banking segment and cited risks from inflated collateral value that is being used by banks as a basis for extending loans. KMB made additional provisions (apart from investment provisions of INR2.1b) and improved its coverage ratio by 436bp QoQ to 64.8%. SMA-2 advances increased to 11bp of loans (4QFY18: 4bp of loans).
• Loans grew 24.7% YoY (+4% QoQ); deposits declined 1.5% QoQ, as the bank is looking to increase the share of retail deposits. Share of core deposits (CASA+ TD less than INR50m) increased to 79% v/s 77% in 4QFY18.

 Subs performance remains mixed

• Kotak AMC reported PAT of INR0.51b (over 3x increase YoY), while investment banking and international subsidiary also reported strong growth. Kotak Securities and Prime, however, reported muted growth. Share of the bank in consol. profit declined to 65%.