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August 3, 2015
Rating matrix
Rating : Hold Kotak Mahindra Bank (KOTMAH) | 690
Target : | 660
Target Period : 12 months Growth trajectory intact; merger to add value
Potential Upside : -4%
The merged banks PAT came in lower-than-expected at | 190 crore
Whats changed? in Q1FY16 (I-direct estimate - | 635 crore)
Target Changed from | 718 to | 660 Variation in earnings was due to lower-than-expected other income
EPS FY16E Changed from | 16.1 to | 8 at | 593 crore (I-direct estimate - | 816 crore) and higher-than-
EPS FY17E Changed from | 19.3 to | 13.1 expected operating expense at | 1593 crore. Higher operating
Rating Unchanged expense could be attributable to integration cost (| 63 crore in
Q1FY16) and alignment of employee compensation making |339
Quarterly performance
crore pension provision for erstwhile ING Vysya Bank employees.
| Crore Q1FY16 Q1FY15 YoY (%) Q4FY15 QoQ (%)
NII 1598.2 1465.3 9.1 1589.7 0.5 Provision surged to | 305 crore; higher than our estimate of |80
Other Income 592.4 979.5 -39.5 1767.2 -66.5 crore, owing to addition in stressed assets from ING Vysya Bank
PPP 597.0 979.5 -39.1 1767.2 -66.2 which forms ~2.5% of overall combined book. Accordingly,
PAT 189.8 573.2 -66.9 1320.8 -85.6 provision on advance climbed higher to | 266 crore in Q1FY16.
NIM declined at 4.2% in Q1FY16 vs 5.1% in Q1FY15, owing to lower
Key financials (Merged)
yield on integrated book and higher interest outgo on saving account
| crore FY14 FY15 FY16E FY17E
of ING Vysya Bank to the tune of | 30 crore. NII came in-line with our
NII 5473 6142 6538 7247
PPP 3705 4166 3424 4278
estimate at | 1598 crore (I-direct estimate - | 1575 crore).
PAT 2165 2477 1457 2369 Credit and deposit grew 9.0% YoY to | 103614 crore and 12.7% YoY
to | 116812 crore, respectively, with CASA ratio at 34.3%
Valuation summary (Merged) As the management has guided for incremental 50 bps credit cost in FY16
FY14 FY15 FY16E FY17E and one-time provisions made in Q1FY16, we have significantly revised
P/E 73.2 50.5 85.9 52.8 our FY16 expected profit lower to |1457 crore for the merged bank.
Target P/E 70.0 48.3 82.2 50.5
P/ABV 8.4 5.9 5.6 5.1
Credit book structure expected to alter with merger
Target P/ABV 8.1 5.7 5.5 5.1 Kotak Mahindra Bank, promoted by Uday Kotak, post receiving a licence
RoA 1.5 1.5 0.8 1.1 in 2002 has grown to a loan-book size of | 103614 crore in FY15 and built
RoE 13.0 12.1 6.5 9.6 a branch network of 1260 branches. Banks retail loans form ~50% of
total loans, which enabled KMB to earn the best NIM in industry at 4.5-
Stock data
4.9% led by high yielding retail loans. With ING Vysya Bank merger,
Market Capitalisation | 127813 crore
GNPA (Q1FY16) | 2421 crore
composition of loan portfolio has been altered with retail advances
NNPA (Q1FY16) | 1077 crore proportion declining to ~43% from 50%. Accordingly, blended margins
NIM (Q1FY16) 4.2 of merged business declined to 3.8-4.0% from 4.5% range in FY16-17E.
52 week H/L 744/460 Savings rate deregulation; raising same to 6% proves beneficial
Equity capital | 453 crore The savings rate was hiked to 6% by KMB post deregulation by the RBI in
Face value |5
September 2010. The bank almost tripled its savings deposits from | 3331
DII holding (%) 3.7
FII holding (%) 35.3
crore in March 2011 to | 14036 crore by March 2015. CASA ratio
improved from 28-29% in the past to 32-33% and is seen averaging
Price performance around 32-34% in merged bank. For combined entity, post merger, we
Return % 1M 3M 6M 12M expect deposit growth at 20.0% CAGR to | 177084 crore in FY17E.
Kotak Mahindra bank 3.4 7.6 8.4 47.1 Strong management, business model and controlled asset quality
HDFC Bank 4.1 12.3 3.1 32.4
Axis Bank 1.2 -0.4 -3.8 40.8
KMB had stable asset quality with NNPA ratio of 1% and negligible
restructured assets. With the merger, GNPA ratio is seen rising to 2.84%,
Research Analyst NNPA ratio to 1.67% in FY16. Kotaks PAT in FY15 remained healthy at
Kajal Gandhi | 1866 crore (24% YoY). Post revisions, we expect merged banks PAT to
kajal.gandhi@icicisecurities.com decline in FY16E to | 1457 crore and grow 62% to | 2369 crore by FY17E.
Vishal Narnolia Maintain HOLD, merger to add strength
vishal.narnolia@icicisecurities.com
KMB trades at rich valuations consistently due to its superior return ratios
Vasant Lohiya and NIM (RoA of ~1.8% and NIM at ~4.8-5%). Post merger, NIMs and
vasant.lohiya@icicisecurities.com
RoA are expected to further dip to 3.8-4.0% and 9.5% in FY17E. However,
they will continue to stay better than peers. Synergy benefits are
expected to accrue over time and improve RoA. Factoring in integration
expense and increased provisioning related to erstwhile ING Vysya Bank,
we have lowered our ABV to | 128.5 from | 145.6. Accordingly, we revise
our target price to | 660 (earlier | 718), valuing on SOTP basis.
Maintaining multiple at 4.0x for bank, thereby we maintain HOLD rating.
PAT 189.8 635.2 573.2 -66.9 1,320.8 -85.6 PAT growth came in lower-than-expected due to higher opex and provision
Key Metrics
GNPA 2,421.8 2,067.9 2,007.7 20.6 1,237.2 95.7 GNPA rose QoQ to 2.3% vs 1.9%
NNPA 1,077.3 935.6 891.0 20.9 609.1 76.9
Total Restructured assets 418.0 200.0 662.0 -36.9 159.1 162.7 | 271 crore of RA added due to integration of ING Vysya Bank
Source: Company, ICICIdirect.com Research
Change in estimates
FY16E FY17E
(| Crore) Old New % Change Old New % Change Comments
Net Interest Income 7,096.9 6,537.8 -7.9 8,473.6 7,247.0 -14.5 NII revised downwards due to lower anticipated advance growth
Pre Provision Profit 4,801.3 3,424.3 -28.7 5,758.3 4,278.1 -25.7
NIM (%) 3.9 3.6 -28 bps 3.9 3.5 -43 bps
Bank has guided on realising ~| 1800-2000 crore from its stressed portfolio over
PAT 2,814.5 1,456.9 -48.2 3,383.1 2,369.5 -30.0 next three years not factored by us in estimates
ABV (|) 254.4 119.6 -53.0 286.9 128.5 -55.2
Source: Company, ICICIdirect.com Research
Assumptions
Current Earlier
FY14 FY15 FY16E FY17E FY16E FY17E
Credit growth (%) 9.4 24.8 0.9 18.7
Deposit growth (%) 15.8 26.7 1.0 19.9
CASA ratio (%) 32.5 35.4 36.0 35.6
NIM calculated (%) 4.5 4.5 3.6 3.5
Cost to income ratio (%) 49.7 52.1 64.4 60.3
GNPA (| crore) 1,703.8 2,010.4 3,615.9 4,371.3
NNPA (| crore) 675.7 779.8 1,819.6 2,544.1
Slippage ratio (%) 1.6 1.0 1.7 1.3
Credit cost (%) 0.4 0.3 0.9 0.4
Source: Company, ICICIdirect.com Research
177084
150000
150856
147669
(| crore)
120000
127137
122968
119018
116812
112755
109155
90000
105198
103676
103614
100506
100289
95101
88856
60000
.
30000
0
FY14
Q1FY15
Q2FY15
Q3FY15
FY15
1QFY16
FY16E
FY17E
Advances Deposits
KMB earns the best NIM in industry at 4.7-5% led by high yielding retail
loans and working capital corporate loans. NII has grown from | 1858
crore in FY10 to | 4224 crore by FY15 supported by strong credit and
savings deposit growth. Post merger, NIM has declined to 4.2% in
Q1FY16, owing to decline in proportion of high yield retail credit and
higher interest outgo on saving account of ING Vysya Bank. Going ahead,
we expect benign NII growth at 8.6% CAGR to | 7247 crore by FY17E on
account of slower credit growth and margin compression. However, as
5.2
5.0 5.0 5.0
(%)
4.9 4.9 4.9
4.8 4.8 4.8 4.8 4.8
4.7 4.7 4.7
4.6 4.6 4.6 4.6
4.4
4.2 4.2
4.0
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Q3FY13
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
FY15
Q1FY16
NIM (%)
1400
1200
1000
800
600
400
200
0
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Q3FY13
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Kotak Prime
The overall loan book has increased nearly four times in seven years from
| 5615 crore to | 19728 crore in Q1FY16. Kotak Prime, the next highest
profit making segment, grew tepidly with loan growth of 11.5% YoY to
| 19728 crore in Q1FY16 while car loans within the same grew 12.3% YoY
to | 15070 crore. PAT came in flat QoQ | 119 crore.
Kotak Securities
Kotak Securities (K-Sec), a KMB subsidiary, has been one of the large
stock broking firms offering both retail and institutional services. It had
9% market share in FY07, which has declined to as low at 2.7%
currently on account of rising options volume generating lower yields
and relative lower push by the broker in the same. The company
clocked an average daily turnover of | 3,720 crore in FY07 and was at
| 3920 crore in FY14, which rose to | 7813 crore in Q1FY16 on the back
of increased volumes in industry.
The end of the JV with Goldman Sachs in May 2006 has not made any
meaningful impact on its market share. Competition intensified in the
recent past in the Indian broking space, which resulted in a fall in broking
yields for all players.
Exhibit 10: Average daily turnover trend
9000
8000
7000
6000
(| Crore)
5000
8372
8372
7813
4000
6621
6053
5205
3000
4648
4522
4261
4248
4160
4137
3925
3903
3814
3800
3720
3692
3673
3600
3582
3343
3300
2000
1000
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Q3FY13
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Source: Company, ICICIdirect.com Research
Exhibit 11: Market share in average daily volume surges in Q1FY16 (reported)
5.5
5.3
5
4.5 4.5
4.3
The market share of Kotak Securities remained at 2.7% in 4 3.9
3.8 3.7 3.8
(%)
With ING Vysya Bank merger, the bank brought down promoter stake
from 40% to 34% and also added value and geographical synergies in the
company. Post merger, NIMs and RoA is expected to decline to 3.8-4.0%
and 9.5% in FY17E, however, will continue to remain competitive
compared to peers. Synergy benefits are expected to accrue over time
and will enable the bank to improve RoA. Factoring in integration expense
and increased provisioning related to erstwhile ING Vysya Bank, we have
lowered our ABV to |128.5 from | 145.6. Accordingly, valuing on SOTP
basis, we revise our target price at | 660 (earlier | 718), maintaining
multiple at 4.0x and, thereby, maintain our HOLD rating on the stock.
800
700
500
400
300
200
100
May-16
Jan-16
May-13
Sep-13
May-14
Sep-14
May-15
Sep-15
Sep-11
May-12
Sep-12
Jan-14
Jan-15
Sep-09
May-10
Sep-10
May-11
Jan-12
Jan-13
Sep-07
May-08
Sep-08
May-09
Jan-10
Jan-11
Jan-08
Jan-09
May-05
Sep-05
May-06
Sep-06
May-07
Jan-05
Jan-06
Jan-07
Key events
Date Event
Mar-03 Promoter stake was at 63% in the bank, post incorporation in 2002
May-05 Announced bonus shares
May-07 In peak market, capital market related businesses were doing well and getting higher valuation multiples. Bank's market cap share in total market used tobe less
FY08 Announced stock split, FV reduced to 5 from 10
Jun-09 Anand Mahindra ceased to be a promoter of the bank
Feb-11 Bank aspired to be national, inorganic (route) is something that was on radar also. Thereafter, the stock saw a new rally and is rising continuously
Oct-11 Savings rate de-regulated by RBI, Kotak Bank offered higher interest rate of 6% above | 1 lakh and 5% below | 1 lakh vs the floor of 4%. This has been very helpful in
saving balance increase as it started adding | 600-800 crore in a quarter post this hike.
Mar-12 Asset quality maintained even with a large commercial vehicle and construction equipment portfolio
Jul-12 RBI asked promoters of Kotak Mahindra Bank to cut their stake in the bank to 20% from 45 % by 2018. With expectation of continuous dilution at higher multiple of
BV, stock price remained on an uptrend
May-13 G-sec yields spiked post Fed announcement on May 22 of its intention to taper QE and tight liquidity measures by RBI of MSF rate hike etc, impacted banks,
particularly wholesale funded however Kotak Bank although being lower on CASA remained resilient
Oct-13 Post liquidity tightening measures like MSF reversed by RBI, stock saw respite
Nov-14 Announced merger with ING Vysya Bank in ratio of 725 shares of Kotak bank for 1000 shares of ING Vysya Bank
Jan-15 Merger approved by shareholders
Apr-15 Scheme of amalgamation of Kotak Mahindra Bank and ING Vysya Bank comes into effect from April 1, 2015
Source: Company, ICICIdirect.com Research
Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;
research@icicidirect.com
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