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Kotak Bank: Analyst meet extracts
Jun 22, 2005

Post the announcement of FY05 results Kotak Bank had its analyst meet to discuss the future prospects of the financial conglomerate. Here are the key extracts from the same. Asset growth: The bank has achieved a growth of 46% in its retail asset book (constituting 87% of total assets) while the corporate loan portfolio (including SMEs) has grown by an impressive 150% YoY. Of the retail portfolio, the highest growth has been witnessed in the home loan book (370% YoY) although on a lower base. For this, the bank has focused on the ‘self employed non professional’ (SENP) segment and envisages a healthy growth (50% YoY in FY06) going forward. The asset growth was backed by 148% growth in low cost deposits (45% of total deposits). Auto loans that continue to command a major chunk of the bank’s disbursals (60%), despite being highly sensitive to interest rate movements, may bring some pressure on the margins if the bank is unable to pass on the higher interest costs to customers.

Loan book breakup
Rs m FY04 % of total FY05 % of total Change
Commercial vehicles 12,389 26.6% 17,175 24.0% 38.6%
Car loans 22,164 47.7% 25,975 36.4% 17.2%
Personal loans 3,065 6.6% 5,421 7.6% 76.9%
Home loans 855 1.8% 4,006 5.6% 368.5%
Corporate banking + SMEs 3,605 7.8% 9,004 12.6% 149.8%
Others 4,428 9.5% 9,866 13.8% 122.8%
Total 46,506   71,447   53.6%

Revenue generation: The consolidated revenues of the entity have grown by 47% YoY, primarily on account of the healthy growth in insurance premium and fee income. While both of these have grown on a smaller base, the growth in lending margins is expected to sustain. With interest rates keeping an upward bias the treasury losses are expected to continue as the bank has only 40% of investments in the HTM (held to maturity) category. However, given the fact that the average duration of the treasury book is between 9 months to 1 year, the assets stand reasonably hedged in the medium term.

Revenue breakup
Rs m FY04 % of total FY05 % of total Change
Financing activities 4,618 39.6% 6,164 36.0% 33.5%
Fee income 2,703 23.2% 3,998 23.4% 47.9%
Premium income 1,465 12.6% 4,609 26.9% 214.6%
Treasury 2,291 19.7% 1,891 11.1% -17.5%
Others 570 4.9% 449 2.6% -21.2%
Total 11,647   17,111   46.9%

Acquisition of stressed assets: Kotak Bank acquired stressed assets worth Rs 10 bn from other banks during FY05. It claims to have acquired these assets at a substantial discount and envisages profitable recoveries from these. This is especially since no profit is booked until the entire amount paid upfront is recovered. For example, if the bank has acquired assets worth Rs 100 m for Rs 30 m and recovers Rs 25 m against payment made of Rs 15 m, the profit of Rs 10 m is not booked. That is no profit is booked until the entire Rs 30 m is recovered.

Subsidiaries: Kotak Securities that clocked an average daily volume of Rs 11 bn (as against Rs 7 bn in FY04) remains the largest cash cow subsidiary for the conglomerate. While Kotak Investments has also shown an impressive growth in bottomline the same is on a lower base. The life insurance subsidiary, Kotak Life, which is the sixth largest private sector life insurance venture in the country, however continues to bleed the bottomline in its gestation period and will require some more time to break even. The company hopes to unlock value from each of these subsidiaries in the longer term.

Bottomline at a glance…
Rs m FY04 % of total FY05 % of total Change
Kotak Bank (standalone) 787 39.5% 849 40.2% 7.9%
Kotak Securities 855 42.9% 1,056 50.0% 23.5%
Kotak AMC 46 2.3% 45 2.1% -2.2%
Kotak Life Insurance (491) -24.7% (458) -21.7% -6.7%
Kotak Investments 89 4.5% 205 9.7% 130.3%
Others 705 35.4% 414 19.6% -41.3%
Total 1,991   2,111   6.0%
Minority interest (249)   (402)    
Consolidated PAT 1,742   1,709   -1.9%

What to expect?
At the current price of Rs 375, the stock is trading at 3.1 times its FY05 adjusted book value. The bank has announced a 3:2 bonus (3 bonus shares for every 2 shares held). With this the paid up share capital of the bank will cross the minimum requisite Rs 3 bn mark for private banks. Ex-bonus the share price of the company is expected to correct to Rs 136 per share (assuming 3.1 times book value). However, a capital adequacy ratio of 12.8% does not seem sufficient to fuel future growth and the bank may have to resort to additional Tier II borrowings.

While the valuations do not look attractive, we do acknowledge the fact that the bank being a well-diversified entity holds considerable potential going forward. The bank seems to have been very conservative in terms of asset quality (net NPA to advances 0.3%). Also, the fact that the bank despite being a relatively new entrant in the private banking space is not a novice in dealing with the dynamics of the financial sector, acts as a comfort. While investors could continue to remain invested in the stock (with a long term perspective), fresh investment at the current levels is not advisable.

Company background
A flagship company of the well-known financial conglomerate Kotak Mahindra Group, Kotak Mahindra Bank was the first banking entity in the country created by conversion of a financial institution in 2003. The bank had 38 branches across 25 cities in India at the end of FY05 and plans to increase its network to 70 branches by FY07 across 40 to 50 cities. The capital adequacy ratio of the bank stood at 12.8% at the end of FY05. The bank has subsidiaries in diverse businesses such as securities broking, investment banking and life insurance. Besides Kotak Securities (46%), Kotak Bank is the only major contributor to the Group’s bottomline (34% in FY05).

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