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Kotak Bank: Lagging peers in growth
Jul 26, 2014

Kotak Bank declared the results for the first quarter of financial year 2014-15 (1QFY15).The bank has reported 10% YoY growth in net interest income and 11% YoY growth in net profits in 1QFY15. Here is our analysis of the results.

Performance summary
  • Net interest income grows 10% YoY in 1QFY15 on the back of 12.6% YoY growth in advances.
  • NIMs improve to 5.1% at the end of 1QFY15 from 4.8% in 1QFY14, higher than sector average (CASA at 31% of total deposits).
  • Other income grows by a strong 38% YoY in 1QFY15.
  • Cost to income ratio for the consolidated entity moved up from 60% in 1QFY14 to 69% in 1QFY15. For the banking entity it stood at 53.5% at the end of June 2014.
  • Gross and net Net NPA for the bank remained stable at 1.6% and 0.8% of advances respectively in 1QFY15, as was the case in 1QFY14. Restructured loans were 0.26% of loan
  • book at the end of June 2014. Having said that the bank has not participated in any CDR scheme.
  • Capital adequacy ratio (CAR) comfortable at 19.1%, Tier I CAR at 18.1% at the end of 1QFY15.

Consolidated financial statement
(Rs m) 1QFY14 1QFY15 Change
Interest income 29,767 31,353 5.3%
Interest Expense 16,027 16,252 1.4%
Net Interest Income 13,740 15,101 9.9%
Net interest margin (%) 4.8% 5.1%  
Other Income 13,562 18,712 38.0%
Other Expense 16,257 23,228 42.9%
Provisions and contingencies 1,508 272 -82.0%
Profit before tax 9,537 10,313 8.1%
Tax 3,035 3,058 0.8%
Minority interest 227 272 19.8%
Profit after tax/ (loss) 6,275 6,983 11.3%
Net profit margin (%) 21.1% 22.3%  
No. of shares (m)   773.8  
Book value per share (Rs)*   256.8  
P/BV (x)   3.7  
*Book value as on 30th June 2014

What has driven performance in 1QFY15?
  • Although better off than the 8% YoY growth in loan book in FY14, Kotak Bank continued to lag its peers in terms of balance sheet expansion in 1QFY15. The bank has been very cautious in its balance sheet growth and network expansion in recent quarters. This was because it 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 corporate segment, while the retail segment de-grew by 2.7% in 1QFY15. While home loans grew by 12% YoY, small business and personal loans grew by 24% 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 17.1% YoY, was helped by the growth in CASA (low cost deposits), up 25.7% YoY. CASA as a share of total deposits went up from 28.9% in 1QFY14 to 31% in 1QFY15.

    Cautious bank balance sheet growth
    (Rsm) 1QFY14 % of total 1QFY15 % of total Change
    Advances  505,390   569,220   12.6%
    Retail  244,300 48.3% 237,600 41.7% -2.7%
    Corporate  261,090 51.7% 331,620 58.3% 27.0%
    Deposits  524,540   614,070   17.1%
    CASA  151,500 28.9% 190,370 31.0% 25.7%
    Term deposits  373,040 71.1% 423,700 69.0% 13.6%
    C/D ratio 96.3%   92.7%    

  • 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 5.1% in 1QFY15, 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 1.6 lac customer accounts during 1QFY15 with the average cost of savings accounts being 5.5%. 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 fee income base by 37% YoY in 1QFY15. 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 1QFY15. The bank had booked losses of 1.7 bn out of total losses of Rs 1.9 bn until March 2014. The remaining losses will be recognized during FY15.

  • Kotak Bank has managed to contain the slippages over the past few quarters. During 1QFY15, the bank's gross and net NPAs remained stable on YoY basis at 1.6% and 0.8% respectively. The banking entity's standalone net NPAs remained stable at around 1%. Total restructured loans classified as standard assets were at 0.02% of gross advances at the end of 1QFY15. 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 945, the stock is valued at 2.5 times our estimated FY17 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. The stock breached our target price of Rs 260 on 18th June 2014. The stock has gained 29% since we recommended it in May 2013.

While bank continued to sustain a good performance on the margin and asset quality front in FY14, its balance sheet growth has come in substantially lower than that of its peers over the last few quarters. Even if we are to assume that Kotak Bank's growth rate will get normalized by the end of FY15, the current valuations seem to factor in most of the medium term upsides. As per our revised estimates, the stock can hardly offer an average annual return of about 6-7% from current levels. We therefore recommend investors to Sell the stock and book profits.

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