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Kotak Bank: ING wind in its tail - Views on News from Equitymaster
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Kotak Bank: ING wind in its tail
May 14, 2015

Kotak Bank declared the results for the March quarter and financial year 2014-15 (FY15). The bank has reported 12% YoY growth in net interest income and 24% YoY growth in net profits in FY15. Here is our analysis of the results.

Performance summary
  • Net interest income grows 12% YoY in FY15 on the back of 24.8% YoY growth in advances.
  • NIMs remain stable at 5% for the bank as well as the consolidated entity.
  • Other income grows by a strong 54% YoY in FY15.
  • Cost to income ratio for the consolidated entity moved up from 63% in FY14 to 67% in FY15. For the banking entity it stood at 51% at the end of March 2015.
  • Net NPA for the bank and the consolidated entity stood at 0.9% and 0.8% of advances respectively in FY15. Restructured loans were 0.24% of loan book at the end of March 2015. Having said that the bank has not participated in any CDR scheme.
  • Capital adequacy ratio (CAR) comfortable at 17.2%, Tier I CAR at 16.2% at the end of FY15.
  • The bank has merged south based ING Vysya Bank with itself in April 2015.
  • The board has approved issue of bonus shares in the ratio of 1:1 and dividend of Rs 0.9 per share (dividend yield 0.1%).

Consolidated financial statement
(Rs m) 4QFY14 4QFY15 Change FY14 FY15 Change
Interest income 30,323 35,170 16.0% 119,859 133,188 11.1%
Interest Expense 15,482 18,369 18.6% 63,121 69,661 10.4%
Net Interest Income 14,841 16,801 13.2% 56,738 63,527 12.0%
Net interest margin (%)       5.0% 5.0%  
Other Income 17,498 26,552 51.7% 52,497 81,038 54.4%
Other Expense 22,546 28,941 28.4% 69,190 97,009 40.2%
Provisions and contingencies (6) 780   3,089 2,057 -33.4%
Profit before tax 9,799 13,632 39.1% 36,956 45,499 23.1%
Tax 2,960 4,278 44.5% 11,529 14,052 21.9%
Minority interest 206 228 10.7% 778 993 27.6%
Profit after tax/ (loss) 6,633 9,126 37.6% 24,649 30,454 23.6%
Net profit margin (%) 21.9% 25.9%   20.6% 22.9%  
No. of shares (m)         773.8  
Book value per share (Rs)*         286.8  
P/BV (x)         4.7  
*Book value as on 31st March 2015

What has driven performance in FY15?
  • Even on standalone basis the growth performance of Kotak Bank in FY15 was better than peers, despite a slow start. The bank had been very cautious in its balance sheet growth and network expansion in the earlier quarters. This was because it intended to keep borrowing and operating costs under tight leash The very high accretion to CASA (with higher interest offered on savings deposits) offered a big boost to deposits, which in turn allowed the bank to get aggressive in retail loans as well. The retail loan segment though grew at a very healthy pace of 40% in FY15. The bank also has enough capital headroom to grow its loan book.

    Bank balance sheet growth backed by retail
    (Rs m) FY14 % of total FY15 % of total Change
    Advances 530,280   661,610   24.8%
    Retail 190,901 36.0% 267,952 40.5% 40.4%
    Corporate 172,450 32.5% 186,574 28.2% 8.2%
    Deposits 590,720   748,600   26.7%
    CASA 188,280 31.9% 275,670 36.8% 46.4%
    Term deposits 327,130 55.4% 422,850 56.5% 29.3%
    C/D ratio 89.8%   88.4%    

  • The stability in NIMs can be attributed to the fact that the bank has been able to nearly double its savings account base within 24 months, by offering 6% interest on the accounts. The savings balance increased 37% 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 other income base by 54% YoY in FY15. The proportion of fee to total income remained stable at around 18%.

  • Kotak Bank has managed to contain the slippages over the past few quarters. During FY15, the bank's gross and net NPAs remained stable on YoY basis. The net NPAs for both the bank and the consolidated entity are below 1%. Although Kotak Bank's asset quality has been reasonably healthy over the past 4 years, the risk of slippage cannot be completely ruled out. We do expect some asset quality challenges to come up in the bank's integration with ING Vysya Bank and the NPA ratios could temporarily go higher..
What to expect?
At the current price of Rs 1,338, the stock is valued at 4.7 times FY15 book value. The merger with ING Vysya Bank has given Kotak a huge fillip in terms of geographical reach as well as balance shet size. We are in the process of reviewing our estimates for the bank after taking into account the merger prospects. Meanwhile the stock is under review.

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