KRChoksey has recommended hold rating on Kotak Mahindra Bank with a target of Rs 530, in its July 20, 2011 research report.
“Kotak Mahindra Bank, posted strong consolidated earnings of Rs 419 crore which grew 27% y-o-y but down 15% q-o-q driven by strong lending operations and steady profitability in life insurance. Asset management, Investment banking and securities businesses continued to be under pressure due to lower volumes and poor yields during the quarter. On standalone basis, NII increased 17.7% y-o-y but down 8.6% q-o-q driven by strong loan growth of 39.5% y-o-y. NIM (calc) contracted 24bps q-o-q to 4.44% due to rise in cost of funds and 300bps contraction in CASA ratio. Non-interest income saw strong traction led by core fee income despite treasury losses due to adverse movement in bond yields. Net profit grew 34.8% y-o-y and 1.3% q-o-q driven by core operating performance ahead of our estimate of Rs 231 crore. Improving asset quality, moderate OPEX growth and lower NPA provisioning boosted profitability during the quarter.”
“NII grew by 17.7% y-o-y and flat on q-o-q basis to Rs 568 crore. The reported margin declined by 30bps q-o-q to 5.0% however it was partly off set by 393bps q-o-q improvement in loan to deposit ratio. NIMs continued to be under pressure due to rise in cost of funds and modest liability franchise as calc. margin contracted by 24bps q-o-q. We believe margin will continue to be under pressure in the next couple of quarters and building in 10bps margin compression in FY12. Non- interest income grew by 40.6% y-o-y to Rs 229 crore driven by core fee income; however after adjusting for processing fee on retail loans, it declined by 7.9% q-o-q. Subdued recoveries coupled with significant treasury losses dragged the growth in non-interest income. We are factoring in 27% CAGR in fee income over FY11-FY13e driven by retail and corporate businesses. The earnings of securities business halved y-o-y to Rs 23 crore, down 36% q-o-q as margin pressure persists, in line with industry trends. The market share in volume declined by 20bps q-o-q to 2.7% primarily because of fall in market share in F&O segment. IB was subdued with 32% y-o-y decline in income and muted profitability. AMC business reported decent profit of Rs 9 crore, flat on y-o-y. We believe capital market linked businesses especially broking and asset management business will continue to see cost rationalization & business restructuring and will remain under pressure in next 8-12 months.”
“Life insurance continued to show steady growth in earnings (Rs 46 crore) with lower business volume. Gross premium income declined by 8.4% y-o-y to Rs 511 crore. We believe life insurance business will continue to grow in profitable manner, going forward. The GNPA inched up marginally in absolute terms growing by 2% q-o-q to Rs 616 crore, down 21% y-o-y; it stood at 1.16%, down 7bps q-o-q reflecting comfortable asset quality as the bank has not seen any significance deterioration in asset quality so far. We expect stable asset quality notwithstanding some pressure from retail portfolio particularly personal loans and CV segments and build in 36bps and 51bps credit in FY12 and FY13 respectively against 40bps in FY11.”
“The bank performed strongly on lending side however, capital market linked businesses remained weak during the quarter. Robust loan growth outlook, aggressive branch expansion strategy, building quality liability franchise and best-in-class margins will drive earning growth in medium term. We expect standalone earnings to grow 26.2% CAGR over FY11-FY13 driven by strong loan and healthy fee income growth. Sharper-than expected margin contraction, slowdown in auto financing and weaker business cycle for capital market businesses are key headwinds for the stock performance in near term. At Rs 490, the stock is trading at 15.3x consolidated FY13 earnings and 2.6x consolidated FY13 book. The stock has outperformed the market by 10% in last three months, resulting into unfavorable risk- reward, hence we downgrade our investment rating on the stock from BUY to HOLD with a target price Rs 530 based on SOTP valuation,” says KRChoksey research report.