Kotak Mahindra Bank rating – Neutral: Growth momentum was maintained in Q4FY22

Kotak maintained strong growth momentum – consolidated loans grew 20.7% y-o-y (+6.1% q-o-q) with the standalone bank at +21.3% y-o-y (7.2% q-o-q). Sequentially, CV/CE, home loans, personal loans, cards, and SME loans grew sharply, while corporate loans declined. Growth in higher-yielding portfolio and a reduction in LCR resulted in NIM surprising positively and expanding 16bp q-o-q to 4.78%. Management intends to grow the unsecured segments from a very low base. PPOP (standalone) grew 12.7% y-o-y (1.8% below estimates). Net income grew 64.5% y-o-y and the beat was entirely driven by write- back of COVID-19 provisions of Rs 4.5 bn.

The key negative was a sequential decline in both average CA and SA growth, which we think points to active balance sheet management to effect a desired growth/NIM outcome. Repeating such strong loan growth/NIM outcome consistently will likely get tougher in FY23F. We maintain Neutral with a lower TP of Rs 1,935.
Asset quality held up: Gross NPA declined 37bp q-o-q to 2.34% while net NPLs declined 15bp q-o-q to 0.64%. Restructured assets declined 12% q-o-q (0.4% of loans). SMA2 was at 7bp of loans. Slippages at Rs 7.4 bn were in line. General provisions (ex of NPL provisions) are 73bps of loans versus 91bps in Q3. The decline was owing to a partial writeback of COVID-19 provisions.

Lower provisions drove net income: Consolidated net income grew ~50% y-o-y, driven by 26% y-o-y growth in aggregate net income for all subsidiaries and 64.5% for the standalone bank. The expense ratio also declined by 520bp q-o-q. There was a net provision write-back that drove net income growth.

Change in estimates; remain Neutral
We lower FY23F EPS by 6% and leave FY24F largely unchanged. We are factoring in a CAGR of 13% in EPS and 12.6% in book-value over FY22-25F. We lower our TP to Rs 1,935, valuing the stock at 3.6x P/B (Mar-23F). We have lowered our price multiple from 4x to 3.6x P/B. While the stock has time-corrected, it still remains expensive for the RoE it delivers. On a consolidated basis, the stock trades at 3.7x P/B (Mar-22) and 27.5x P/E (12m to Mar-23F) vs the last 10-year average of 3.9x P/B and 26x P/E, respectively. The implied valuation of standalone bank is 3x P/B on a 12m-forward basis.