Kotak Mahindra Bank - Fuelling the secured growth engine; stress pool on anticipated lines - ICICI Securities

Kotak Mahindra Bank's Q3FY21 earnings were characterised by rising comfort towards lending to better-rated large corporates (up 7% QoQ), MSMEs under sovereign guaranteed ECLGS schemes (Rs97bn till date), and secured retail portfolio (up 5% QoQ). On anticipated lines, proforma GNPAs rose to 3.27% (from 2.7% in Q2FY21), SMA-2 settled at 0.3%, approved restructuring was much lower at 0.28% (suggesting sub-4% stress pool) and well covered with provisioning build-up of 2.9%. Unsecured retail and CV (bus operator segment) portfolios are reflecting disproportionate stress. Overhead costs failed to cheer due to rising spends towards a few growth initiatives. On subsidiaries, auto financing and investment banking gained earnings traction while international subsidiaries saw a dip. The stock has corrected 9% since our downgrade to Hold and we now upgrade it to ADD with the target price unchanged at Rs 2,023. Key risks: 1) stress unfolding post unwinding of regulatory forbearance; 2) Lower than anticipated growth can cap RoE improvement.

- Juxtaposing rise in proforma GNPA with SMA-2, restructuring and no ARC sale suggests stress on anticipated lines: The bank has approved restructuring (0.28% of advances) based on viability assessments and without resorting to analytical subjectivity; this has allowed stress to flow into GNPA or SMA-2 buckets. Consequently, Rs19bn slipped in Q3FY21 (3.5% run-rate) leading to rise in proforma GNPAs to 3.27% (up 57bps QoQ), and SMA-2 even in these challenging times is merely at 0.31%. Against this, it has specific coverage of 78% and standard (Rs10bn) + Covid-related buffer of 1.1% at Rs12.8bn. Management highlighted there was disproportionately higher stress in unsecured credit (constituting 40% of sequential delta in proforma GNPAs) and also in CV (especially bus operator segment). Credit cost for Q3FY21 and 9MFY21 at 115bps suggests our FY21E estimate of 160bps (ask-rate of >300bps) is too conservative, hence we revise it to 1.3%/1.2% for FY21E/FY22E, thereby leading to earnings upgrade of 7%/3% respectively.

- Warming up secured credit engine: Lower deposit cost is aiding the bank to warm up its credit engine to a select few less risky segments for growth (without hurting margins). There is rising comfort towards lending to better-rated large corporates (up 7% QoQ), MSMEs under sovereign guaranteed ECLGS schemes (disbursed Rs97bn till date), and secured retail portfolio (mortgages up 5% QoQ). This supported 4.5% QoQ growth in advances (though still lower YoY). With a robust liability franchise, the bank highlighted its medium-term strategic shift towards asset-side customer acquisition, with key focus on secured lending. While growth will be below industry average in FY21 at 3%, we expect it to gain momentum in FY21E/FY22E at 17-20%.

- Active on ECLGS disbursements; sovereign guarantee lends comfort: The bank has disbursed nearly Rs94bn till Q3FY21 under ECLGS (Rs97bn till date) - suggesting ~5% market share of system ECLGS disbursements against its credit market share of 2%. Management is drawing comfort on the sovereign guarantee attached to this lending and, as it still garners reasonable yields, has deep dived into the portfolio to assess potential customers and disbursed it to 50-60% of ex-corporate/mortgage portfolio as eligible pool. The customers are spread across all three business segments - small businesses in consumer banking, commercial banking and SME (lower end of corporates) and split would be 80% for consumer/commercial banking and 20% in SME. Many customers who took ECLGS benefit have lowered their utilization of other limits, hence there is not much of an uptick in the portfolio growth (flat YoY). No excess leveraging was reflected in the flattish YoY growth suggesting that portfolio might not throw stress post the moratorium benefit if economic activity comes back to normal.

- Strong CASA deposit accretion continues; deposit rates cut: Build-up of robust, sustainable and granular deposit franchise was reflected in 21% YoY and 10% QoQ growth in CASA deposits. CASA now constitutes 59% (highest-ever) of total deposits despite 146bps YoY reduction in SA cost to 3.81%. Nature of deposits continues to be granular with 92% of retail deposits being below Rs 50mn. The benefit of low deposit cost would aid the bank to offer competitive rates (in line with large players) among various secured lending products, thereby gaining market share.

- Overhead costs fail to cheer; core fee income sustains momentum: Overhead costs was up 20% QoQ (flat YoY) due to increased spends on promotions / advertising, collections / recoveries, home loan acquisition cost, insurance on deposits, etc. Employee costs, on the other hand, were lower as there was no element of pension in Q3FY21 (compared to Q3FY20 and Q2FY21). Core fee income sustained momentum with 10% QoQ rise post >35% QOQ rise in Q2FY21 (also up 3% YoY).

Shares of KOTAK MAHINDRA BANK LTD. was last trading in BSE at Rs.1766.7 as compared to the previous close of Rs. 1795.15. The total number of shares traded during the day was 210818 in over 18509 trades.

The stock hit an intraday high of Rs. 1823.05 and intraday low of 1747.3. The net turnover during the day was Rs. 375578626.

Source : Equity Bulls

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