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Kotak Bank: Tight leash on costs
Jan 25, 2014

Kotak Bank declared the results for the third quarter and first nine months of financial year 2013-14 (9mFY14).The bank has reported 20% YoY growth in each net interest income and net profits in 9mFY14. Here is our analysis of the results.

Performance summary
  • Net interest income grows 20% YoY in 9mFY14 on the back of 6% YoY growth in advances.
  • NIMs improve to 4.9% at the end of 9mFY14 from 4.6% in 9mFY13, higher than sector average (CASA at 41% of total deposits).
  • Other income grows by 6.3% YoY in 3QFY14 after more than 50% YoY fall in 2QFY14. For the 9 month period, other income has fallen by 3.7% YoY. The fee income however remained stable in 3QFY14 over that in 3QFY13.
  • Cost to income ratio for the consolidated entity fell from 67% in 9mFY13 to 61% in 9mFY14. For the banking entity it stood at 57% at the end of December 2013.
  • Gross and net Net NPA for the bank moved up from 1.5% and 0.6% of advances in 1HFY14 to 2% and 1.1% in 9mFY14. Restructured loans were 0.08% of loan book at the end of December 2013. Having said that the bank has not participated in any CDR scheme.
  • Capital adequacy ratio (CAR) comfortable at 19.2%, Tier I CAR at 17.9% at the end of 9mFY14.

(Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Interest income 28,114 29,942 6.5% 78,910 89,536 13.5%
Interest Expense 15,799 15,950 1.0% 43,982 47,639 8.3%
Net Interest Income 12,315 13,992 13.6% 34,928 41,897 20.0%
Net interest margin (%)       4.6% 4.9%  
Other Income 13,456 14,302 6.3% 36,334 34,998 -3.7%
Other Expense 16,835 18,785 11.6% 47,879 46,643 -2.6%
Provisions and contingencies 589 638 8.3% 1,395 3,095 121.9%
Profit before tax 8,347 8,871 6.3% 21,988 27,157 23.5%
Tax 2,489 2,873 15.4% 6,685 8,804 31.7%
Profit after tax/ (loss) 5,858 5,998 2.4% 15,303 18,353 19.9%
Net profit margin (%) 20.8% 20.0%   19.4% 20.5%  
No. of shares (m)         773.8  
Book value per share (Rs)*         240.0  
P/BV (x)         2.9  
*Book value as on 31st December 2013

What has driven performance in 9mFY14?
  • Kotak Bank continued to keep its balance sheet growth and costs under tight leash in the third quarter. Both loan and deposit growth came in lower than the sector average and well below the rates clocked by its peers. Most of the growth, however, has come on the back of growth in the retail segment. While mortgage loans grew by 13% YoY, small business and personal loans grew by 39% YoY. The bank also has enough capital headroom to grow its loan book although the management believes that growth may continue to remain moderated in the near term. Deposit growth at 6.1% YoY, was not just below sector average; but the growth in CASA (low cost deposits) which showed traction until June 2013 slowed down considerably. CASA as a share of total deposits went down from 47% in 9mFY13 to 41% in 9mFY14.

    Bank's CASA, corporate loan growth slow down
    (Rs m) 9mFY13 % of total 9mFY14 % of total Change
    Advances 502,450   531,490   5.8%
    Agri 73,100 14.5% 90,230 17.0% 23.4%
    Retail 266,100 53.0% 339,880 63.9% 27.7%
    Corporate 163,250 32.5% 166,210 31.3% 1.8%
    Deposits 515,240   546,710   6.1%
    CASA 244,130 47.4% 222,190 40.6% -9.0%
    Term deposits 271,110 52.6% 324,520 59.4% 19.7%
    C/D ratio 97.5%   97.2%    

  • Despite the lower growth in CASA relative to term deposits, a lower proportion of bulk deposits helped improve the bank's net interest margins (NIMs) in 9mFY14. In fact, at 4.9%, the NIMs are higher than sector average. The bank has been able to nearly double its savings account base within 24 months, by offering 6% interest on the accounts. It added 1.5 m accounts in 3QFY14 itself and the savings balance increased 38% YoY. Since the accounts have replaced costly term deposits, they have had a benign impact on the net interest margins (NIMs) as well.

  • Kotak Bank has been able to grow its fee income base by 17% YoY in 9mFY14. Also, the proportion of fee to total income remained was 29% for the quarter ended December 2013. However, the treasury losses (on account of amortization of mark to market losses, as against transfer to HTM bucket) led to the fall in other income by 3% in 9mFY14. The bank has booked losses of 1.3 bn out of total losses of Rs 1.9 bn until December 2013. The remaining losses will be recognized over the next few quarters.

  • Kotak Bank has managed to contain the slippages over the past few quarters. However, in 3QFY14, the bank's net NPAs, moved up marginally to 1.1% of advances from 0.6%. Total restructured loans classified as standard assets were at 0.08% of gross advances at the end of 9mFY14. Although Kotak Bank's asset quality has been reasonably healthy over the past 4 years, the risk of slippage cannot be completely ruled out. While exposure to Deccan Chronicle was the only big ticket loan that turned bad in FY13, the bank remains susceptible to NPA risks in CV segment as well.

  • Profit from such recovery of stressed assets acquired, on an average; formed 7% of Kotak Bank's other income (net of insurance income) over the past 4 years.
What to expect?
At the current price of Rs 685, the stock is valued at 2.1 times our estimated FY16 adjusted book value. Despite a comfortable capital base, the bank is not targeting aggressive growth in loan book or fee income. The bank has yet to recognize MTM losses of Rs 650 m over the next few quarters. This will impact near term profitability. We believe a moderate growth with an eye on maintaining margins and asset quality can help the bank compete very effectively in the sector. However, the asset quality of the bank warrants consistent review. We recommend investors to buy the stock at current levels or lower. Please however ensure that no stock comprises more than 5% of your portfolio.

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