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Kotak Bank: ING NPAs weigh on profits - Views on News from Equitymaster
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Kotak Bank: ING NPAs weigh on profits
Sep 4, 2015

Kotak Bank declared the results for the first quarter of financial year 2015-16 (1QFY16).The bank has reported 43% YoY growth in net interest income and 26% YoY drop in net profits in 1QFY16. Here is our analysis of the results.

Performance summary
  • Net interest income grows 43% YoY in 1QFY16 on the back of 84% YoY growth in advances. Since the acquisition of ING Vysya Bank was in second half of FY15, the numbers are not comparable.
  • NIMs drop from 5.0% at the end of 1QFY15 to 4.3% in 1QFY16, despite CASA staying at 34% of consolidated deposits.
  • Other income falls by a 23% YoY in 1QFY16.
  • Cost to income ratio for the consolidated entity stayed at about 70% in 1QFY16
  • Gross and net Net NPA for the bank were at 2.3% and 1% respectively after sale of some stressed assets in the books of ING Vysya to asset reconstruction companies.
  • Capital adequacy ratio (CAR) comfortable at 16.5%, Tier I CAR at 15.3% at the end of 1QFY16.

Consolidated financial statement
(Rs m) 1QFY15 1QFY16 Change
Interest income 31,353 49,418 57.6%
Interest Expense 16,252 27,784 71.0%
Net Interest Income 15,101 21,634 43.3%
Net interest margin (%) 5.0% 4.3%  
Other Income 18,712 14,427 -22.9%
Other Expense 23,228 25,363 9.2%
Provisions and contingencies 241 3,279 1260.6%
Profit before tax 10,344 7,419 -28.3%
Tax 3,345 2,283 -31.7%
Minority interest 16 (31) -293.8%
Profit after tax/ (loss) 6,983 5,167 -26.0%
Net profit margin (%) 22.3% 10.5%  
No. of shares (m)   1,820.8  
Book value per share (Rs)*   166.0  
P/BV (x)   3.7  
*Book value as on 30th June 2015

What has driven performance in 1QFY16?
  • On standalone basis the growth performance of Kotak Bank in 1QFY16 was better than peers. 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.

  • While the branch banking business is expected to be integrated by April 2016, the acquisition of ING Vsysa has already offered Kotak sufficient leverage in balance sheet expansion. Home loans, SME loans and large corporate loans accounted for 20%, 21% and 30% of loan book for the bank.

  • 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. CASA continued to remain 34% of total deposit book.

  • Pressure on interest costs however weighed on the bank's NIMs which came down to 4.3% in 1QFY16.

  • Integration costs also hurt the bank's treasury portfolio which led to other income coming in lower as compared to 1QFY16.

  • As per Kotak, about 6% of the loan book of erstwhile ING Vysya Bank is in various forms of stress (i.e. about 2.5% of the consolidated book). This includes:
    • NPAs
    • Assets Sold to ARCs;
    • Assets under CDRs;
    • Restructured assets;
    • Standard, but under "Watchlist"

    The bank estimates additional provisions (net of expected recovery) of about 0.4%-0.5% of the combined book in the current fiscal for bringing the loan book to the desired quality. Total restructured loan book was at 0.4% of advances at the end of June 2015.

  • The bank has also made provisions of Rs 3.4 bn for retiral benefits of ING employees, Rs 300 m on additional savings bank account interest to ING account holders (at 6% savings deposit rates).
What to expect?
At the current price of Rs 606, the stock is valued at 2.9 times our estimated FY18 adjusted book value. Despite a comfortable capital base, the bank is not targeting aggressive growth in loan book or fee income. While the bank is very well poised to grow and reap the benefits of the merger with ING in the long term, we would recommend investors to wait before buying the stock with additional margin of safety in valuations.

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