Brokerages share mixed views on Kotak Mahindra Bank after Q4; CLSA, ICICI Direct retain buy call

Brokerage houses were mixed in their views on Kotak Mahindra Bank after its March quarter earnings.

The bank reported a standalone profit of Rs 1,266.6 crore for the quarter ended March 2020, registering a 10 percent fall due to a significant jump in COVID-19 related provisions.

The stock largely remained rangebound after witnessing recovery from March lows. It was quoting at Rs 1,189.75, up 0.27 percent on the BSE at 12:10 hours IST.

While maintaining a buy call on the stock and raising price target to Rs 1,450 (from Rs 1,425 earlier), global research firm CLSA has raised its earnings estimates by 10-12 percent for FY21/22.

It believes MSME package will support Kotak Mahindra Bank as the lender has a relatively higher share in MSME loans, though profit was lower during the quarter due to higher provisions and loan growth slowed to 7 percent but deposit traction remained strong.

On May 13, Finance Minister Nirmala Sitharaman unveiled Rs 6 lakh crore package for micro, small and medium enterprises (MSMEs), NBFCs which are majorly impacted by the lockdown started on March 25.

FM announced Rs 3 lakh crore collateral-free automatic loans for business (including MSMEs), Rs 20,000 crore subordinated debt for MSMEs and Rs 50,000 crore equity infusion through MSME Fund of Funds, while there will be Rs 30,000 crore liquidity facility for NBFC/HCs/MFIs and Rs 45,000 crore Partial Credit Guarantee Scheme 2.0 for NBFCs. Also, the definition of MSMEs has been changed.

The private sector lender has reported a 10 percent year-on-year decline in Q4FY20 profit at Rs 1,266.6 crore as provisions rose 6-fold YoY to Rs 1,047.47 crore due to Rs 650 crore provisions towards COVID-19.

Net interest income grew by 17.2 percent YoY to Rs 3,559.65 crore with NIM at 4.72 percent and loan growth at 7 percent in Q4, while deposits increased by 16 percent.

Asset quality improved due to moratorium as slippage declined 50 percent sequentially. Gross non-performing assets declined 21 basis points and net NPA 18 basis points QoQ.

While maintaining buy call with a target at Rs 1,623 per share, ICICI said, "The stock has outperformed broader indices and rightly so, it deserves premium given lower risk of volatility and higher visibility on stability and scalability. We believe conservatism, risk cautiousness and stability take precedence in such circumstances."

Also, stable subsidiaries’ performance would provide support to valuations, it added.

Management articulated to stay cautiously optimistic, focus on sustainability and resilience, customer acquisition through digital route and grow franchises in non-credit businesses.

Overall, operating performance stood healthy during the March quarter, with a pre-provision operating profit (PPoP) growing at 19 percent YoY.

Motilal Oswal cut its profit estimates for FY21/22 by 14/8 percent, primarily as it factored in higher credit cost while estimating Kotak Bank to maintain a cautious stance on lending, although a reduction in SA/TD rates would aid margins.

On the asset quality front, the brokerage expects non-performing loans formation to increase due to rising stress in the commercial vehicles (CV) and unsecured segments. However, the brokerage estimates Kotak to deliver controlled credit cost versus peers, even as the moratorium book is quite the same.

Motilal Oswal maintained a neutral rating on the stock with a target price of Rs 1,350 per share.

HDFC Securities feels valuations are expensive and as a result, it has add rating on the stock with a target of Rs 1,282.

"Kotak Bank's Q4 earnings were below estimates, due to high COVID-19 related provisions (a trend seen across banks in Q4). GNPA growth was contained by the standstill classification. Its strong capital base, stable & granular deposit franchise and superior underwriting practices make it one of the best placed in the sector," said the brokerage.

"A fund-raise, while RoAE dilutive, is not undesirable. It would (1) partly resolve the promoter stake issue and (2) further strengthen the bank's already strong balance sheet," it added.

Emkay Global has retained hold rating on Kotak Mahindra Bank as the stock offers a safe harbor in the current risk-off environment, given its strong liability/capital buffer, traditionally conservative underwriting and pedigree management.