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Maintain ADD on Kotak Mahindra Bank - Growth ahead, COVID behind? - HDFC Securities

Posted On: 2020-10-26 23:02:52

Mr. Darpin Shah, Institutional Research Analyst, HDFC Securities

2QFY21 earnings were significantly ahead of our estimates, led by better-than-expected operating performance and lower-than-expected LLPs. In stating that current non-specific provisions are more than adequate to cover the impact of COVID-19 and that it now sees significant potential for calibrated growth, the management was quite sanguine in its outlook. We have revised our earnings estimates upwards and maintain ADD (SoTP value of Rs 1,426).

Focus shifting to growth: While the bank's loan book de-grew 4% YoY (flat QoQ), the management explicitly stated that it would focus on capturing growth, as it sees significant opportunity amidst the 'new normal'. However, we continue to factor in a ~13.6% loan CAGR over FY22-23E, and we believe our estimates already capture the bank's credit growth potential.

Sequentially flat deposits: Interestingly, after two consecutive quarters of strong deposit growth, deposits were flat QoQ (+12.2% YoY) due to sequentially flattish SA deposits and a slight decline in term deposits. This is surprising as several banks continued to log strong sequential deposit growth, and particularly SA growth, in 2Q. However, KMB's liability franchise remains undoubtedly strong with a CASA of ~57%.

Asset quality trends: Adjusted for the impact of the recent SC order, GNPAs were 2.7% (flat QoQ, +38bps YoY). SMA 2 stood at just 6 bps (vs. 20bps YoY). Collection efficiency for Sept-20 was in the 'mid-nineties', and the bank continued to witness improving trends, with secured products faring better. Nevertheless, we continue to build elevated GNPAs at 3.9% in FY21E.

Non-tax provisions dipped 9.6/61.7% to ~Rs 37bn and were 60.6% below our estimates. Even as KMB's COVID-19 related provisions are just 62bps of loans (total non-specific provisions at 1.1% of loans), the management was quite emphatic in stating that these provisions were sufficient to cover the economic impact of COVID-19. While we have reduced our credit cost estimates, they remain elevated, at 1.08% over FY21-23E, and in tandem with our GNPA estimates.

Shares of KOTAK MAHINDRA BANK LTD. was last trading in BSE at Rs.1415.75 as compared to the previous close of Rs. 1383.05. The total number of shares traded during the day was 284604 in over 17385 trades.

The stock hit an intraday high of Rs. 1428.4 and intraday low of 1347.75. The net turnover during the day was Rs. 395860733.

Source: Equity Bulls

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