Buy Kotak Mahindra Bank; target of Rs 1179: Motilal Oswal

Motilal Oswal's research report on Kotak Mahindra Bank

PAT grew 22% YoY to INR9.94b (3% miss). Operating profit increased 20% YoY, led by healthy NII growth (+16% YoY, even as NIM shrunk 17bp QoQ to 4.33%), steady fee income growth (+29% YoY) and controlled operating expenses. Asset quality remains healthy, with the GNPL ratio declining by 11bp QoQ to 2.47% and the coverage ratio by 260bp QoQ to 49.7%. The bank received RBI inspection report and no divergence was reported as of March 2017.  Loan growth gained momentum, coming in at 21% YoY (+7% QoQ), led by strong traction in CV, small business and personal banking segments. Deposit growth stood at 17% YoY/1% QoQ. Other highlights: a) CASA growth remained strong at 44% YoY (62% YoY growth in SA deposits). CASA ratio thus increased 390bp QoQ to 47.8%. b) SMA2 advances declined to 16bp of loans v/s 21bp in 1QFY18, while OSRL declined to INR650m (4bp of loans). Other businesses: a) Profitability in the securities business improved to INR1.18b, up 23% YoY, while Kotak Life Insurance also reported strong earnings growth. b) K-Sec market share stood at 1.9% (stable QoQ). c) Asset management business average AUM increased 9% QoQ (+57% YoY), led by strong inflows in equity AUM (+102% YoY).

Outlook

The bank's share in consolidated profits now stands at ~69% (67.6% in 2QFY17), and we expect this to increase further as synergy benefits show up fully in FY18. Among subsidiaries, KM Securities, KM Life Insurance and Kotak AMC reported healthy earnings growth. We expect ~26% earnings CAGR over FY17-19, led by a revival in loan growth and controlled opex. Strong presence across geographies/products and healthy capitalization (Tier1 of ~19%) place the bank in a sweet spot to capitalize on growth opportunities and gain market share. Comfort on asset quality remains high, with no SDR/5:25, negligible SMA2 (16bp) and OSRL (4bp). At our SOTP based TP of INR1,179, KMB will trade at 4.0x Sep19E consolidated BV. Buy.

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