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Kotak Bank: Banking biz. gathers steam - Views on News from Equitymaster

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Kotak Bank: Banking biz. gathers steam

Jul 27, 2013

Kotak Bank declared the results for the first quarter of financial year 2013-14 (1QFY14).The bank has reported 25% YoY and 46% YoY growth in net interest income and net profits respectively in 1QFY14. Here is our analysis of the results.

Performance summary
  • Net interest income grows 25% YoY in 1QFY14 on the back of 19% YoY growth in advances.
  • NIMs remain improve to 4.8% at the end of 1QFY14 from 4.7% in 1QFY13, higher than sector average (CASA at 29% of total deposits).
  • Other income grows by a robust 57% YoY, with fees and commissions growing in excess of 39% YoY.
  • Cost to income ratio for the banking entity at 43.5% in 1QFY14.
  • Net NPA to advances move up from 0.1% of advances in 1QFY13 to 0.2% in 1QFY14. Restructured loans were 0.02% of loan book at the end of June 2013. During 1QFY14, the bank purchased bad loans to the tune of Rs 230 m.Having said that the bank has not participated in any CDR scheme.
  • Capital adequacy ratio (CAR) comfortable at 18.8%, Tier I CAR at 17.6% at the end of 1QFY14.

Financial performance: A snapshot
(Rs m) 1QFY13 1QFY14 Change
Interest income 24,698 29,767 20.5%
Interest Expense 13,692 16,027 17.1%
Net Interest Income 11,006 13,740 24.8%
Net interest margin (%) 4.7% 4.8%  
Other Income 8,618 13,562 57.4%
Other Expense 13,043 16,257 24.6%
Provisions and contingencies 193 1,595 726.4%
Profit before tax 6,388 9,450 47.9%
Tax 2,004 3,035 51.4%
Profit after tax/ (loss) 4,384 6,415 46.3%
Net profit margin (%) 17.8% 21.6%  
No. of shares (m)   773.8  
Book value per share (Rs)*   224.5  
P/BV (x)   3.0  
*Book value as on 30th June 2013

What has driven performance in 1QFY14?
  • While the tepid loan growth, at 20% YoY, reflected the underlying sentiment in the credit market, Kotak's banking business continued to gather steam in 1QFY14. Most of the growth has come on the back of growth in the retail segment. While mortgage loans grew by 20% YoY, personal loans grew by 70% 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 26% YoY, was not just well above sector average, but was fuelled by demand CASA (low cost deposits). CASA as a share of total deposits went up from 26.6% in 1QFY13 to 28.8% in 1QFY14.

    Steady growth in bank bal. sheet
    (Rs m) 1QFY13 % of total 1QFY14 % of total Change
    Advances 423,180   505,390   19.4%
    Retail 114,120 25.0% 148,990 29.5% 30.6%
    Corporate 317,385 75.0% 356,400 70.5% 12.3%
    Deposits 416,320   524,540   26.0%
    CASA 110,540 26.6% 151,320 28.8% 36.9%
    Term deposits 305,780 73.4% 373,220 71.2% 22.1%
    C/D ratio 101.6%   96.3%    

  • The higher growth in CASA relative to term deposits helped improve the bank's net interest margins (NIMs) in 1QFY14. In fact, at 4.8%, 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. 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 39% YoY in 1QFY14. Also, the proportion of fee to total income remained stable at 23%. Further, the treasury gains and income from bought out NPAs grew by 209% and 226% YoY respectively..

  • Kotak Bank has managed to contain the slippages over the past few quarters. The bank's net NPAs, however moved up marginally to 0.2% of advances from 0.1% in 1QFY13. Total restructured loans classified as standard assets were at 0.02% of gross advances at the end of 1QFY14. 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.

  • While the business of buying bad loans from other financial entities seems to be risky, Kotak Bank has not only kept its exposure to such loans very limited but has also fetched a reasonable proportion of other income from recoveries. 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 680, 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. We believe a moderate growth with an eye on maintaining margins and asset quality can help the bank compete very effectively in the sector. We reiterate our Hold view on the stock. Please also ensure that no stock comprises more than 5% of your portfolio.

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