Kotak Mahindra Bank Q3 Results Review - Margins Surprise On The Upside, Upgrade To 'Buy': Systematix

Systematix Research Report

Kotak Mahindra Bank Ltd. reported Q3 FY24 earnings of Rs 30 billion, (+6% QoQ, -2% YoY). The reported earnings were broadly in-line with estimates with flattish net interest margins (versus expectation of decline) compensating for the 7% QOQ increase in opex.

Key highlights of the quarter were:

1. Net advances increased by 3.2% QoQ, 16% YoY with broad based contribution with 24-29% of incremental qoq credit from unsecured loans, mortgages and commerical vehicle/construction equipment.

2. Deposits growth of 2% QoQ, 19% YoY was led by term deposit growth of 3% QoQ while current account and savings account growth was flat QoQ. CASA ratio declined to 47.7% (-52 bps QoQ). Borrowings increased by 15% QoQ with higher lower cost re-financing from SIDBI.

3. However, NIMs remained stable QoQ as 17 bps qoq increase in cost of funds was largely offset by 16 bps yields on the back of improved interest earning assets mix which had higher share of high yielding credit substitutes in the investment book.

4. Other income declined 1% QoQ due to mark-to-market loss, in OIS book, of Rs 1.68 billion versus gains for key peers.

5. Cost to income ratio increased to 48.4% (+194 bps QOQ) due to higher retirement costs and higher festive led promotional spends.

6. While key asset quality metrics gross/net non-performing asset at 1.7%/0.3% were stable QoQ, the bank highlighted emerging stress in credit cards, MFI and tractor finance. Kotak Mahindra Bank also provided Rs 1.9 billion (21 bps of Net advances) for its alternative investment fund exposure (post tax impact of Rs 1.43 billion),

7. The bank delivered return on asset of 2.2% and return on equity of 13.2%.

We rollover our forecasts to March-26 and upgrade our rating to 'Buy' from 'Hold' with March-25 target price of Rs 2,095 (from Rs 1,940) valuing the standalone bank at 2.5 times Mar-25 adjusted book value per share (same multiple as ICICI Bank Ltd.) for FY25-26E average retuan on asset of 2.2% versus 2.1% for ICICI Bank Ltd.

We assign Rs 515 per share for its holding in the subsidiaries. We also factor the proceeds from the sale of 51% stake in Kotak General Insurance to Zurich Insurance, for Rs 40.5 billion, expected to be completed by June-24.

Our rating upgrade considers our expectation of continuity of policies under the new Managing Director-Mr Ashok Vaswani, with the bank being amongst our preferred picks within the large cap private banks.

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