Kotak Mahindra
Bank: What should investors
do?
Kotak Mahindra Bank: What should investors do?
Updated - September 28, 2024 at 09:23 PM.
A sum of the parts valuation reveals little upside left from current price
By Nishanth Gopalakrishnan BL Research Bureau
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Kotak Mahindra Bank (KMB) is the fourth largest private bank in India. Over
the years, it has been a good all-round performer in all three key aspects –
balance sheet growth, asset quality and margins. However, now a host of
challenges such as the embargo on the issue of new credit cards and a
resultant drop in NIM, dropping CASA ratio and signs of stress in credit card
accounts are stacked up for the management to overcome. The management has
measures in place, as explained below, to take on these challenges. The
efficacy of the same remains to be seen.
Before the pandemic• Медицина » Эпидемиология » Пандемия, the stock of KMB used to trade at a premium to its peers
such as HDFC Bank, ICICI Bank and Axis Bank. Investors flocked to buy the
stock for its relatively higher NIM (net• Страхование » Нетто interest margin) and CASA (current
account savings account) ratio. Post the recovery from Covid• Медицина » Эпидемиология » Инфекционные заболевания » Вирусология » Вирусы » Коронавирусы
• Медицина » Заболевания » Инфекционные заболевания » Вирусология » Вирусы » Коронавирусы lows, a time wise
correction has played out along with a P/B derating driven by the fact that
the RoE (return on equity) of KMB is lower than the above peers, among other
factors. A sum of the parts valuation some upside left in the stock. While not
sufficient to warrant fresh investing, existing investors can continue to hold
the stock for the long term.
Credit card embargo
In late April, the RBI ordered the bank to cease issuing new credit cards and
onboarding new customers through online channels due to concerns over the
bank’s IT infrastructure. Credit card receivables are high yielding and make
for about 3.8 per cent of the total loan book as of Q1 FY25. While advances
grew at 3.7 per cent quarter on quarter during the quarter, credit card
receivables grew a mere 1 per cent due to the RBI’s embargo. NIM for the
quarter dropped 26 bps to 5 per cent sequentially, due to the feeble growth in
the high yielding credit cards, among other factors such as degrowth in
low-cost CASA balances.
Per the management, ever since the order, the bank has demonstrated progress
and commitment to set things right and is in constant interaction with the
central bank. It appears that the RBI will lift the ban once it is satisfied
of the bank’s commitment and not wait until KMB ticks off every single item in
the defined scope of work. The management says it is hard to predict at what
stage the ban will be lifted.
In December 2020, HDFC Bank received a similar order from the RBI to stop
issuing new credit cards. Although the RBI allowed the bank to issue fresh
cards after eight months in August 2021, the ban was lifted completely (after
five quarters) in March 2022. In this period of five quarters, HDFC Bank
managed to grow credit card receivables at a brisk pace of 19 per cent,
despite initial hiccups. Quarterly NIMs were also largely stable with
fluctuations of about 10 bps. Credit card receivables make around 5.5 per cent
of HDFC Bank’s loan book.
KMB’s management is upbeat about achieving growth in mid-teens in the
unsecured segment (personal loans and credit cards) this fiscal, having
witnessed growth in credit card spends market share in May compared with
March.
Watch out for
There are four key things to monitor.
One, credit cost (net• Страхование » Нетто provisions divided by advances) for FY25 may be elevated
due to stress noticed in low-ticket credit card accounts, especially where
customers are over leveraged. Also, recoveries in the corporate banking book
are waning in comparison to recovery levels post-Covid• Медицина » Эпидемиология » Инфекционные заболевания » Вирусология » Вирусы » Коронавирусы
• Медицина » Заболевания » Инфекционные заболевания » Вирусология » Вирусы » Коронавирусы, due to little to no
recovery expected from newer credit costs.
Two, the increased spending to strengthen the IT infrastructure may take the
cost to income ratio of the current and the next fiscal upward. The management
has plans for up to 1,500 new branches over five years. This also can impact
the cost to income ratio, though the management is sanguine about keeping the
ratio low with incremental revenue flowing from the new branches and
leveraging technology.
Three, the CASA ratio and deposit growth. The CASA ratio has plummeted from
60.5 per cent in FY21 to 43.4 per cent as of Q1 FY25 (still higher than peers
above). In Q1 FY25, the year-on-year growth in advances exceeded that of
deposits, pushing the LDR (loan-deposit ratio) up by about 300 bps to 87.2 per
cent. The bank has taken two key initiatives to shore up deposits. One,
renewed focus on the ActivMoney product (sweep facility) with ad campaigns.
Two, offering bundled products, that include investment and lending, targeting
the affluent, NRIs and early jobbers, in top cities.
Four, possible pressure on NIM due to rate cuts, as KMB has a large linked
exposure on the assets side (Loan book linked to Repo rate was 58 per cent in
FY24).
Subsidiaries
Four key subsidiaries constitute about 19 per cent of the group’s net• Страхование » Нетто worth
and about 30 per cent of the share price – Kotak Securities (share broking),
Kotak Mahindra Asset Management Company (mutual funds), Kotak Mahindra Prime
(car loans) and Kotak Mahindra Life Insurance• Страхование. All four are wholly-owned
subsidiaries.
The capital market subsidiaries Kotak Securities and Kotak AMC have posted
stellar growth in net• Страхование » Нетто profit in the latest-concluded quarter, with 83 per cent
and 65 per cent year-on-year growth respectively.
Kotak Prime’s customer assets grew 21 per cent year on year and profit grew a
mere 6 per cent due to increase in provisions. The company is well
capitalised, with a capital adequacy ratio of 25 per cent. Kotak Life’s
profitability got impacted on higher distribution cost and ended the quarter
with a profit degrowth of 10 per cent. Solvency ratio is at 2.48 times as
against the regulatory minimum of 1.5 times.
In mid-June 2024, KMB sold part of its stake in Kotak Mahindra General
Insurance (KGI), a wholly-owned subsidiary then, to Zurich Insurance• Объект организация » Организации по алфавиту » Организации на Zu » Группа Zurich
• Страхование » Страховые компании » Страховые компании Швейцарии » Группа Zurich,
resulting in a post-tax profit of ₹3,013 crore on a consolidated basis. KMB
also infused capital into the divested company after the deal. KMB now holds
30 per cent of KGI.
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Published on September 28, 2024
