Kotak Mahindra Bank

Financial services sector to witness sharp spike in Non-performing assets – Kotak Bank

Update on the Indian Equity Market:

Markets failed to keep the initial gains as Nifty closed the day 0.1% higher at 10,618. IT sector led the index higher with WIPRO (+16.9%), INFY (+6.5%) and HCL (+5.7%) while the losing stocks for the day RELIANCE (-3.9%), BHARTIARTL (-3.6%) and ZEEL (-2.9%). Among the sectors, IT (5.2%), FMCG (0.7%) and PHARMA (0.6%) while REALTY (-2.1%), MEDIA (-1.7%) and PSU BANK (-1.4%) were the laggards.

Edited excerpts of an interview with Mr Uday Kotak, Managing Director, Kotak Bank Ltd. (Kotak); dated 14th July 2020 from CNBC TV-18:

  • The banks would need to be capitalized to the extent of Rs 2-3 lakh crore. The recent fund raising spree by banks was a step in this direction.
  • The banking sector’s total loan book is about Rs 100 lakh crore. The loan losses to the extent of 4-5 percent of total loans could turn Non-Performing Loans (NPL) due to COVID-19. Against this spike in NPL, he believes that the financial sector will need recapitalization of 2-3 percent of the loan book.
  • The financial sector is going all out to beef-up the reserves to be able to absorb the shocks coming out of the crisis. The key lesson for lenders from the crisis is to tighten their lending practices and make loans after taking risks into account.
  • Commenting on the recent surge in the stock market, he said that the market is ignoring short term issues and valuations are based on future recovery. Lower interest rates and disproportionate liquidity globally and locally are helping the equity market as savers have few avenues to invest in.
  • He also mentioned sectors like airlines, tourism, entertainment, hotels and restaurants had been disproportionately affected due to the issues faced by these industries.
  • He said that if the job situation worsens, unsecured customers will add risk. He will be closely watching for recovery in the most affected sectors and job stability very closely.

Consensus Estimate: (Source: market screener, investing website)

  • The closing price of Kotak Bank was ₹ 1,289/- as of 15-July-2020. It traded at 3.3x/ 2.9x/ 2.7x the consensus BV estimate of ₹ 393/ 442/ 472 for FY21E/ FY22E/ FY23E respectively.
  • The consensus target price of ₹ 1,382/- implies a PB multiple of 2.9x on FY23E BV of ₹ 472/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Full impact assessment after clarity on stimulus – Mr Uday Kotak, Kotak Mahindra Bank

Update on the Indian Equity Market:

On Thursday, Indian shares erased the gains of the previous day after the initial stimulus announced by the government to aid Covid-19 hit businesses was poorly received. The gloomy outlook from the head of the U.S. Federal Reserve did not help the market sentiment either, as Nifty ended 2.6% lower at 9,143. Among the sectoral indices, IT (-3.5%), Financial Services (-3.4%), and Bank (-2.9%) led the losers. FMCG (+0.7%) and Pharma (+0.3%) were the only sectoral gainers. INFRATEL (+4.9%), HEROMOTOCO (+2.9%), and ZEEL (+2.2%) led the gainers. TECHM (-5.4%), INFY (-5.2%), and HINDALCO (-4.8%) ended in the red.

Full impact assessment after clarity on stimulus – Mr. Uday Kotak, Kotak Mahindra Bank

Excerpts from an interview with Mr. Uday Kotak, Executive Vice Chairman & MD, Kotak Mahindra Bank published in Financial Express dated 14th May 2020:

  • Kotak Mahindra Bank (KMB) recently declared its 4QFY20 results. The bank has divided the stress tests to assess the full impact of Covid-19 into two sets- up to March 31 and after March 31. Gross provisioning done toward a specific account gives a net NPA of 0.71%. A look at standard provisioning plus Covid provisioning and others independent of direct provisioning led to total provisioning being greater than the total net NPA.
  • Starting FY21 with a clean slate in terms of the balance sheet and from the point of view of all provisioning, which was felt necessary.
  • In terms of FY21, the bank is in uncharted territory. While work has been done in different sectors, a lot will depend on how the lockdown opens up, and how the stimulus is given. Impact assessment of the virus’ impact on the bank’s loan book will be possible after there is some clarity on government fund flows to various sectors.
  • In regard to unsecured retail lending, the bank had become conservative on advances well before the pandemic started. Thus, growth in advances was more calibrated in design. He believes that retail unsecured is where pressure is going to come at some point in time. Hence, KMB’s portfolios on unsecured consumer retail have been far more conservative than earlier.
  • The post-Covid era will help reduce the impact of the potential burden which may come out of stress, particularly in unsecured retail which is pretty sensitive to the lockdown and the slowdown in the economy. So, they are waiting for the stimulus.
  • Talking about the credit growth, they have received wide estimates by expert economists on growth for FY21. KMB will be getting out there and supporting the economy provided they are comfortable with the risks.
  • They will continue to be cautious on unsecured consumer lending to make sure that the consumer is well-protected. He is of the opinion that if many companies start retrenching people, which is something we can assume may happen, then even unsecured lending to salaried customers will come under pressure.
  • They will watch out for sectors directly affected by Covid like tourism, hospitality, or retail malls.

Consensus Estimate: (Source: market screener website)

  • The closing price of Kotak Mahindra Bank was ₹ 1,177/- as of 14-May-2020. It traded at 3.0x/ 2.6x the consensus book value estimate of ₹ 398/450 for FY21E/ FY22E respectively.
  • The consensus target price of ₹ 1,399/- implies a PB multiple of 3.1x on FY22E BV of ₹ 450/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”


Kotak Mahindra Bank (KMB standalone) 1QFY20

Kotak Mahindra Bank (KMB standalone) 1QFY20: Moderation in Advances growth, stable asset quality

  • KMB reported advances at Rs 2,080 bn, 18% higher YoY.
  • NII at Rs 31,730 mn was 23% higher YoY.
  • NIM for 1QFY20 was 4.49% compared to 4.28% in 1QFY19.
  • Provisions were Rs 3,168 mn, 33% lower YoY.
  • PAT at Rs 13,602 mn was 33% higher YoY
  • GNPA and NNPA were relatively flat at 2.19% and 0.73% respectively for 1QFY20 compared to 2.14% and 0.75% respectively in 4QFY19.

Management commentary:

  • Advances growth in corporate and business banking segments has been low. Consumer and commercial advances have reported strong growth of 20%+ in FY20.
  • Management expects to continue around 20% growth in advances.
  • NIM expansion is likely due to pricing power and lower cost of funds.
  • Interest rate on Savings accounts below Rs 1 lac is reduced to 4% from 5% earlier. Benefit of the rate reduction will reflect in 2QFY20.
  • Provision for retirement benefit has been significantly higher YoY due to lower interest rates.

Consensus Estimate (Source: marketscreener website)
• The stock price was Rs 1,494/- on 23rd July 2019 and traded at 5.8x/3.7x  the consensus Book value for FY20E/21E of Rs 258/404  respectively. 
• Consensus target price is Rs 1,499/- implying PB of 3.7x for FY21E BVPS of Rs. 404/-