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Kotak Bank: Other income buoys margins

Nov 7, 2014 | Updated on Oct 30, 2019

Kotak Bank declared the results for the second quarter of financial year 2014-15 (2QFY15). The bank has reported 12% YoY growth in net interest income and 23% YoY growth in net profits in 2QFY15. Here is our analysis of the results.

Performance summary
  • Net interest income grows 11% YoY in 2QFY15 on the back of 19.3% YoY growth in advances.
  • NIMs improve to 5.0% at the end of 1HFY15 from 4.9% in 1HFY14, higher than sector average (CASA at 31% of total deposits).
  • Other income grows by a strong 70% YoY in 1HFY15.
  • Cost to income ratio for the consolidated entity moved up from 57% in 1HFY14 to 67% in 1HFY15. For the banking entity it stood at 51% at the end of September 2014.
  • Gross and net Net NPA for the bank remained stable at 1.6% and 0.8% of advances respectively in 1HFY15, as was the case in 1HFY14. Restructured loans were 0.26% of loan book at the end of September 2014. Having said that the bank has not participated in any CDR scheme.
  • Capital adequacy ratio (CAR) comfortable at 17.6%, Tier I CAR at 16.6% at the end of 1HFY15.

Consolidated financial statement
(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Interest income 29,825 32,686 9.6% 59,593 64,043 7.5%
Interest Expense 15,662 16,848 7.6% 31,689 33,101 4.5%
Net Interest Income 14,163 15,838 11.8% 27,904 30,942 10.9%
Net interest margin (%)       4.9% 5.0%  
Other Income 7,133 16,517 131.6% 20,696 35,230 70.2%
Other Expense 11,600 20,998 81.0% 27,858 44,226 58.8%
Provisions and contingencies 861 582 -32.4% 2,457 854 -65.2%
Profit before tax 8,835 10,775 22.0% 18,285 21,092 15.4%
Tax 2,895 3,340 15.4% 5,954 6,658 11.8%
Minority interest 115 256 122.6% 227 272 19.8%
Profit after tax/ (loss) 5,825 7,179 23.2% 12,104 14,162 17.0%
Net profit margin (%) 19.5% 22.0%   20.3% 22.1%  
No. of shares (m)         773.8  
Book value per share (Rs)*         266.5  
P/BV (x)         4.2  
*Book value as on 30th September 2014

What has driven performance in 2QFY15?
  • Kotak Bank managed to catch up with its peers in terms of balance sheet expansion in 2QFY15. 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. The corporate loan segment though grew at a very healthy pace of 44% in 1HFY15. 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 29.4% YoY, was helped by the growth in CASA (low cost deposits), up 29.5% YoY. CASA as a share of total deposits remained stable at 38%.

    Cautious bank balance sheet growth
    (Rs m) 1HFY14 % of total 1HFY15 % of total Change
    Advances 682,260   814,180   19.3%
    Retail 244,010 35.8% 267,870 32.9% 9.8%
    Corporate 172,450 25.3% 248,450 30.5% 44.1%
    Deposits 526,420   681,030   29.4%
    CASA 199,290 37.9% 258,180 37.9% 29.5%
    Term deposits 327,130 62.1% 422,850 62.1% 29.3%
    C/D ratio 129.6%   119.6%    

  • The stability in NIMS can be attributed to the fact that the bank has been able to nearly double its savings account base within 24 months, by offering 6% interest on the accounts. 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 other income base by 70% YoY in 1HFY15. The proportion of fee to total income remained stable at around 18%.

  • Kotak Bank has managed to contain the slippages over the past few quarters. During 1HFY15, 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 1HFY15. 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.
What to expect?
At the current price of Rs 1,111, the stock is valued at 2.9 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. Even if we are to assume that Kotak Bank's growth rate will get more aggressive going forward, the current valuations seem to factor in most of the medium term upsides. We therefore recommended investors to Sell the stock in July 2014. We recommend that investors should not buy the stock at current valuations.

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Jun 25, 2021 03:35 PM


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