PL Stock Report: Kotak Mahindra Bank (KMB IN) - Q2FY24 Result Update - Strong quarter; MD&CEO approved by RBI - BUY

Kotak Mahindra Bank (KMB IN) - Gaurav Jani - Research Analyst, Prabhudas Lilladher Pvt Ltd.

Rating: BUY | CMP: Rs1,770 | TP: Rs2,250

Q2FY24 Result Update - Strong quarter; MD&CEO approved by RBI

Quick Pointers:

§ Core PAT beat of 13% led by higher NII, fees and lower opex.

§ Incumbent CEO has a fintech and digital banking background.

KMB saw a good quarter; core PPoP beat PLe by 12.5% owing to better NIM, fees and lower opex. Momentum continues in loan growth (+6.0% QoQ) that was broad based. Asset quality saw a minor blip as gross slippages were higher. SA was flat QoQ as focus is on scaling up ‘AcitvMoney’ and aim is to retain SA customers at rates lower to TD. Overhang relating to MD&CEO position goes away with Mr. Ashok Vaswani being approved by RBI. His nomination suggests bank’s long term focus on digital retail banking. KMB is a solid banking franchise with strong balance sheet, prudent credit practices and attractive RoA profile of 2.2-2.3% (ICICIB 2.0%). However, over last 2-3 years, earnings quality of ICICIB has been superior with likely core RoE at 17% (KMB 14%). We trim multiple to 3.3x (3.5x earlier) but roll forward to Sep’25 core ABV, maintaining SOTP based TP at Rs2,250. Retain ‘BUY’.

§ Core PPoP beat led by better NIM/lower opex; asset quality a slight miss: NII was a tad higher at Rs63.0bn (PLe Rs61.1bn) due to better margins and loan growth. NIM was a beat yet again at 5.35% (PLe 5.18%), -15bps QoQ, due to higher yield on investments/cash. Credit growth was a beat at ~18.5% YoY (PLe 17.3%). Deposit accretion was in-line at 23.3% YoY. Other income was ahead at Rs23.15bn (PLe Rs22.75bn) due to fees and treasury. Opex was lower at Rs40.0bn (PLe Rs41.7bn) due to both, staff cost and other opex. PPoP was Rs46.1bn; core PPoP was 12.5% higher to PLe. Asset quality was a slight miss; while GNPA was in-line at 1.7%, gross slippages were higher at Rs13.14bn (PLe Rs10bn). Provisions were Rs3.67bn (PLe Rs3.4bn). PAT was Rs31.9bn while core PAT at Rs26.3bn was 13.2% ahead of PLe.

§ Sequential credit growth was well spread: Loan growth was 6.0% QoQ that was broad based led by corporate (+5.5%), consumer (10.7%), unsecured (9.8%), CV/CE (8.8%) and housing (4.2%). Wholesale growth was on account of strong demand from large corporate/SME while credit substitutes declined due to more focus on loans compared to bonds (with rates remaining elevated). We are factoring an overall loan CAGR of 18.4% over FY23-26E. Deposit growth was largely driven by TD (+5.3% QoQ); on a QoQ basis SA was flat while CASA fell by 75bps to 48.3%. Bank is focused on scaling up ‘AcitvMoney’ deposits which is cannibalizing SA. Aim is to retain SA at rates lower to TD via ‘AcitvMoney’ which grew by 28% QoQ led by shift from SA to ‘AcitvMoney’.

§ Benign credit costs to cushion NIM fall: NIM declined by 15bps QoQ, due to faster rise in CoF and ICRR impact of 14-15bps. Bank suggested that majority of deposits are already reprised implying that CoF may rise at a slower pace in H2FY24; quarterly NIM may fall that would be offset by benign credit costs. We expect NIM for FY24E at 4.89% (vs 4.85% in FY23): Bank has received RBI approval to appoint Mr. Ashok Vaswani as MD&CEO. As Mr. Vaswani is set to join on 1st Jan’ 24 and tenure of current MD & CEO ends on 1st Nov’23, bank would apply for extension of current MD from smooth transitioning.

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