|Kotak Mahindra bank (KMB) has successfully transformed itself from a mere NBFC/capital market proxy into a full-fledged credible banking franchise over the last decade with lending business contributing around ~83% of earnings vs. ~40% in FY08. Unlike some of its peer group banks, KMB has been extremely prudent in its selection of credit and always focused on risk adjusted return on its asset book which has resulted in the bank being on an extremely strong footing in such turbulent times. Higher granularity in savings franchise and increase in cross-sell to overall group customers are some of the key differentiating aspects which will result in the bank building a sustainable liability franchise in the long run. We believe that the bank is extremely well positioned to participate in next credit cycle given well capitalized position, stable asset quality, scalable business model and excellent execution track record. Hence we initiate coverage on the stock with a BUY rating and a TP of INR 806/share based on SOTP methodology.
Well diversified loan mix; prudent credit selection hold the key
Since its inception, the bank has always followed a risk adjusted return strategy on both its retail and wholesale loan book. Hence despite pursing a growth strategy (loan has been at 29% over FY08-13 vs. systemic growth of 18%), asset quality has remained stable across business cycles. The bank has an extremely diversified, granular loan book. In retail loans, car, tractor and CV financing are its key niches while in wholesale loans it focuses on primarily working capital and trade financing. Unlike its peers, the bank has been extremely prudent in avoiding exposures to chunky project loans. We expect Kotak to maintain its current loan growth strategy without diluting its risk profile and expect loan growth at 24% CAGR over FY13-15e.
Liability franchise rolls out on; Focus on granularity, higher customer transactions and cross sell
The bank is adopting a more calibrated approach in building its liability franchise with a concerted focus on building granular savings deposits. Savings rate de-regulation by the RBI has given the bank a strategic fillip which the bank is leveraging aggressively to acquire customers. The bank is also using loyal customer base of its group entities (Kotak Prime and Kotak Securities) to make significant inroads into savings deposits.
Excellent Top Management Team; Minimal top management churn
The Top Management has been with founder Uday Kotak for close two decades and has seen it grown from a capital market and niche NBFC player into a full fledged bank. Further, senior management have seen significant value unlocking from employee stock options. Hence management churn is almost negligible. Feedback from both top and senior management is that culture at the bank is refreshingly entrepreneurial which distinguishes the bank from its peer group.