MOSL: KOTAK MAHINDRA BANK (Buy)-Operating environment improving-Subs performance remains robust

KOTAK MAHINDRA BANK: Operating environment improving; Subs performance remains robust

(KMB IN, Mkt Cap USD35.8b, CMP INR1209, TP INR1400, 16% Upside, Buy)

• Standalone results: 4QFY18 PAT grew 15% YoY to INR11.24b (4% miss) on higher opex (gratuity provisions) and provisions. Operating profit grew 19% YoY to INR20.2b (in-line), led by 19% YoY NII growth. FY18 PAT, thus, grew 20% YoY to INR40.8b (FY18 consol. PAT up 25.5% YoY to INR62.0b).
• Margin expanded 15bp QoQ to 4.35% on 41% YoY growth in CASA deposits. SA deposits grew 58% YoY (+12% QoQ). CASA ratio, thus, improved to 50.8% (46.7% in 3QFY18).
• Asset quality held stable, with NNPL declining by 3.6% QoQ, even as GNPL increased by 3% QoQ. PCR improved by 300bp QoQ to 56.5%, led by significantly higher-than-expected provisioning. GNPL/NNPL ratios, thus, improved 9bp/11bp QoQ to 2.22%/0.98%. SMA-2 advances stood at 4bp of loans at INR720m - lowest-ever level since KMB started reporting the same.
• Loans grew 24.7% YoY (+6.7% QoQ); deposits rose 22.4% YoY (+6.5% QoQ). Share of core deposits (CASA+ TD less than INR50m) was 77% v/s 75% QoQ.
• Subs performance robust: a) KMPL reported PAT of INR1.6b (+20% YoY), while Kotak Securities reported PAT of INR1.34b (+11% YoY). b) Kotak Mahindra Capital, Life Insurance and Asset Management also reported strong net profit growth, driving consol. net profit to INR17.89b (+27% YoY). c) Asset management business' average AUM rose 4% QoQ (+35% YoY). KMB reported embedded value of its life insurance company at INR58.2b, while FY18 new business margin was 29.3% (VNB: INR5.22b). 13-month persistency stands at 85.2% (compares well with other major insurers).