Analyst Corner| KMB: Maintain ‘buy’ as bank continues to see improvement

For 3QFY21, KOTAKB’S profit of Rs 18.5bn, up 16%YOY, was below estimate due to higher credit costs. High slippages & rise in SMA2 loans were disappointing- coupled with interest-reversal, this pushed up credit cost. We are encouraged to see 22% rise in Casa to 59% of deposit and improved lending appetite & demand (loans up 5% QoQ ). While we watch out for asset quality, we believe improved lending is a better barometer of mgt.’s risk assessment. MaintainBuy.

Higher slippages from unsecured loans a tad disappointing. Kotak bank saw relatively higher slippages during 3Q, mostly emanating from unsecured loans. Slippages rose by 88% YoY (including standstill loans) and this lifted proforma gross NPLs to 3.3% of loans-highest since 1QFY11. Even SMA-2 loans rose from 0.06% of loans in 2Qto 0.3% in 3Q .At the same time, the extent of restructuring was low at 0.3% of loans and management reiterated that the quality of ECLG loans/borrowers (4.4% of loans; linked to+20% of loans) is good and hence should not show weak credit experience. NPL coverage ratio (post standstill) at 63% seems lower, but the bank’s contingent provisions at 0.6% of loans and26% of gross NPLs seem sufficient. During 3Q, credit costs rose to 1.2% of avg. loans (incl. reversal of interest income)& was a key driver of the earnings miss.

Casa strength and uptick in economy driving loan growth. Kotak Bank continues to see improvement in deposit franchise with 22% growth in Casa deposits to an industry-leading level of 59% of deposits. Even the cost of savings deposits has declined to 3.8% from 5.2% in March. This along with management’s view of the improving economy (and implicit view on asset quality) reflects an uptick in loan growth to 5% QoQ(-1%YoY). We believe that growth can continue to improve and a fall in funding costs will help. Mortgage loans are a key segment of lending and bank also highlighted near normalcy in disbursements in segments like corporate, SME working capital and secured retail (mortgages). Inline operating profit of bank & mixed-bag for subs. Operating profits rose by 29%YoY and even adjusted for income reversal it rose by 22%. Assets grew by 20% YoY with investments growing faster vs. loans, reflecting management’s conservative stance over the past few quarters.