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Kotak Bank: Higher NIMs ease cost burden - Views on News from Equitymaster

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Kotak Bank: Higher NIMs ease cost burden
Jun 16, 2014

Kotak Bank declared the results for the financial year 2013-14 (FY14).The bank has reported 18% YoY growth in net interest income and 13% YoY growth in net profits in FY14. Here is our analysis of the results.

Performance summary
  • Net interest income grows 18% YoY in FY14 on the back of 8% YoY growth in advances.
  • NIMs improve to 5.0% at the end of FY14 from 4.7% in FY13, higher than sector average (CASA at 33% of total deposits).
  • Other income grows by mere 3.4% YoY in FY14. During 4QFY14, however, other income grew by 21% YoY.
  • Cost to income ratio for the consolidated entity fell from 66% in FY13 to 63% in FY14. For the banking entity it stood at 49% at the end of March 2014.
  • Gross and net Net NPA for the bank moved up from 1.3% and 0.6% of advances in 1HFY14 to 1.6% and 0.9% in FY14. Restructured loans were 0.02% of loan book at the end of March 2014. Having said that the bank has not participated in any CDR scheme.
  • Capital adequacy ratio (CAR) comfortable at 18.8%, Tier I CAR at 17.8% at the end of FY14.


Consolidated financial statement
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Interest income 29,467 30,323 2.9% 108,378 119,859 10.6%
Interest Expense 16,262 15,482 -4.8% 60,244 63,121 4.8%
Net Interest Income 13,205 14,841 12.4% 48,134 56,738 17.9%
Net interest margin (%)     4.7% 5.0%  
Other Income 14,418 17,498 21.4% 50,752 52,497 3.4%
Other Expense 17,733 22,546 27.1% 65,612 69,190 5.5%
Provisions and contingencies 436 (6)   1,831 3,089 68.7%
Profit before tax 9,454 9,799 3.6% 31,443 36,956 17.5%
Tax 2,713 3,035 11.9% 9,399 11,839 26.0%
Minority interest 85 131 54.1% 160 468 192.5%
Profit after tax/ (loss) 6,656 6,633 -0.3% 21,884 24,649 12.6%
Net profit margin (%) 22.6% 21.9%   20.2% 20.6%  
No. of shares (m)         773.8  
Book value per share (Rs)*         247.6  
P/BV (x)         3.8  
*Book value as on 31st March 2014

What has driven performance in FY14?
  • Kotak Bank has been very cautious in its balance sheet growth and network expansion in FY14. This was because the bank intended to keep borrowing and operating costs under tight leash. 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 agriculture and corporate segment. While home loans grew by 13% YoY, small business and personal loans grew by 17% 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 15.3% YoY, was helped by the growth in CASA (low cost deposits), up 26% YoY. CASA as a share of total deposits went up from 30% in FY13 to 33% in FY14.

    Cautious balance sheet growth
    (Rs m) FY13 % of total FY14 % of total Change
    Advances 662,580   716,930   8.2%
    Agri 83,560 12.6% 104,680 14.6% 25.3%
    Retail 107,270 16.2% 120,990 16.9% 12.8%
    Corporate 145,350 21.9% 173,190 24.2% 19.2%
    Deposits 510,290   590,720   15.8%
    CASA 149,180 29.2% 188,280 31.9% 26.2%
    Term deposits 361,110 70.8% 402,440 68.1% 11.4%
    C/D ratio 129.8%   121.4%    

  • Thanks to better growth in CASA relative to term deposits and a lower proportion of bulk deposits, the bank's net interest margins (NIMs) moved up to 5.0% in FY14, 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 16.3 m accounts in FY14 with the average cost of savings accounts being 5.5%. The savings balance increased 39% 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 17.8% YoY in FY14. The proportion of fee to total income remained stable at around 18%. However, the treasury losses (on account of amortization of mark to market losses, as against transfer to HTM bucket) curbed the growth in other income in FY14. The bank has booked losses of 1.7 bn out of total losses of Rs 1.9 bn until March 2014. 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 FY14, the bank's net NPAs, moved up marginally to 0.9% of advances from 0.6%. Total restructured loans classified as standard assets were at 0.02% of gross advances at the end of FY14. Although Kotak Bank's asset quality has been reasonably healthy over the past 4 years, the risk of slippage cannot be completely ruled out. 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 929, the stock is valued at 2.8 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 some MTM losses 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. The stock has gained 27% since we recommended it in May 2013. We recommend investors to hold on to the stock and not buy more at current levels. Please however ensure that no stock comprises more than 5% of your portfolio.

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