kotak mahindra bank (kotmah) -...

January 19, 2016

ICICI Securities Ltd | Retail Equity Research

Result Update

Synergy benefits with prudent asset quality PAT came in at | 635 crore, above our estimate of | 584 crore. The

variation was primarily due to higher-than-expected non-interest income at | 722 crore (I-direct estimate - | 658.8 crore). In addition, opex came in lower at | 1283 crore (I-direct estimate - | 1322 crore)

Provision came in higher at | 235 crore, in lieu of securities receipts (SR) and credit substitutes wherein a significant portion was contributed by ING Vysya Bank. Asset quality remained resilient with QoQ net GNPA addition at | 35 crore with absolute GNPA at | 2690 crore (improvement of 5 bps QoQ to 2.3%)

NIM remained steady QoQ, at 4.3% in Q3FY16, which led to 5.2% QoQ growth in NII at | 1766 crore (I-direct estimate - | 1744 crore). The bank has incurred | 35 crore in Q3FY16 on realignment and thereby higher interest outgo on ING Vysya Banks saving deposits

The credit book grew 9.6% YoY to | 115345 crore, lower-than our estimate of | 123081 crore. Deposit accretion came in at 10.0% YoY to | 130939 crore with CASA ratio at 35.3%

The management has maintained its guidance of incremental 80-85 bps credit cost in FY16E and combined advance growth of ~15% in FY16E. Credit book to grow at ~14% CAGR in FY16-17E Kotak Mahindra Bank, promoted by Uday Kotak, post receiving a licence in 2002, grew to a loan book size of | 103614 crore in FY15. It has built a branch network of 1298 branches. Retail loans form ~50% of total loans, enabling KMB to earn the best NIM in industry at 4.5-4.9% led by high yielding retail loans. With the ING Vysya Bank merger, composition of the loan portfolio has been altered with retail advances proportion declining to ~42% from 50%. Accordingly, blended margins are expected to remain steady. Credit book (merged entity) has been revised lower and is expected to grow at 13.7% CAGR in FY15-17E to | 140996 crore. CASA accretion to continue at healthy pace The savings rate was hiked to 6% by KMB post deregulation by RBI in September 2010. The bank almost tripled its savings deposits from | 3331 crore in March 2011 to | 14036 crore by March 2015. CASA ratio improved from 28-29% in the past to 32-33% and is seen averaging around 32-34% in merged bank. For the combined entity, post merger, we expect deposit growth at 16.1% CAGR to | 165661 crore in FY17E. Strong management, business model and controlled asset quality KMB had stable asset quality with NNPA ratio of 1% and negligible restructured assets. With the merger, GNPA ratio is seen rising to 2.4%, NNPA ratio to 1.0% in FY16E but overall asset quality remains manageable. PAT in FY15 remained healthy at | 1866 crore (24% YoY). Post merger, we expect PAT to grow at 13.6% in FY16E and 22% in FY17E to | 2587 crore. Maintain HOLD, synergy benefit may lead to upward re-rating KMB has been trading at rich valuations consistently due to its superior return ratios and NIM (RoA of ~1.8% and NIM at ~4.8-5%). For the merged entity, NIMs and RoA are expected to remain at steady at ~4% and 10.3% in FY17E, and will continue to stay better than peers. Factoring in higher-than-expected bottomline, check on integration expense and prudent asset quality, we have marginally revised our FY16-17E estimates upwards. With business synergies expected to gain further traction, we maintain our target price at | 677, valuing the stock on SOTP basis. Maintaining multiple at 4.0x for the bank, we reiterate HOLD rating.

Kotak Mahindra Bank (KOTMAH) | 671 Rating matrix Rating : HoldTarget : | 677Target Period : 12 monthsPotential Upside : 1%

Whats changed? Target UnchangedEPS FY16E Changed from | 10.6 to | 11.7EPS FY17E Changed from | 12.8 to | 14.2Rating Unchanged Quarterly performance | Crore Q3FY16 Q3FY15 YoY (%) Q2FY16 QoQ (%)NII 1766.2 1551.1 13.9 1678.7 5.2Other Income 722.2 1017.7 -29.0 1044.8 -30.9PPP 1205.2 1017.7 18.4 1044.8 15.4PAT 634.7 610.2 4.0 569.5 11.5 Key financials (Merged) | crore FY14 FY15 FY16E FY17ENII 5473 6142 6957 7959PPP 3705 4166 4170 4853PAT 2165 2477 2121 2587 Valuation summary (Merged)

FY14 FY15 FY16E FY17EP/E 75.0 51.9 60.6 49.7 Target P/E 71.8 49.7 58.0 47.5 P/ABV 8.6 6.1 5.6 5.0 Target P/ABV 8.3 5.9 5.4 4.9 RoA 1.5 1.5 1.1 1.2 RoE 13.0 12.1 9.3 10.3

Stock data Market Capitalisation | 122823 croreGNPA (Q3FY16) | 2690 croreNNPA (Q3FY16) | 1111 croreNIM (Q3FY16) 4.3%52 week H/L 744/594Equity capital | 453 croreFace value | 5DII holding (%) 4.2FII holding (%) 34.7 Price performance

R eturn % 1M 3M 6M 12MK otak Mahindra bank -5.0 1.2 -9.0 -4.3H D F C Bank -4.4 -6.7 -7.6 2.4Axis Bank -13.7 -26.0 -38.0 -27.5 Research Analyst

Kajal Gandhi [email protected]

Vishal Narnolia [email protected]

Vasant Lohiya [email protected]

ICICI Securities Ltd | Retail Equity Research Page 2

Variance analysis Q3FY16 Q3FY16E Q3FY15 YoY (%) Q2FY16 QoQ (%) Comments

NII 1,766.2 1,744.3 1,551.1 13.9 1,678.7 5.2NIM (%) 4.30 4.30 4.70 -40 bps 4.30 0 bps Steady NIM supports NII growth

Other Income 722.2 658.8 699.7 3.2 615.7 17.3Treasury income came in at | 259 crore vs | 159 crore in Q2FY16 (including | 62 crore of one-time income reversal in Q2FY16)

Net Total Income 2,488.4 2,403.2 2,250.8 10.6 2,294.5 8.5Staff cost 618.2 594.8 615.8 0.4 623.0 -0.8 Integration cost of | 13 crore in Q3FY16; | 142 crore in 9MFY16Other Operating Expenses 665.0 727.0 617.3 7.7 626.7 6.1

PPP 1,205.2 1,081.4 1,017.7 18.4 1,044.8 15.4

Provision 235.3 209.2 91.4 157.3 176.4 33.4Higher-than-expected provision owing to provision related on SRs and credit substitutes

PBT 970.0 872.2 926.2 4.7 868.4 11.7Tax Outgo 335.2 287.8 316.0 6.1 298.9 12.2

PAT 634.7 584.4 610.2 4.0 569.5 11.5PAT growth came in higher-than-expected due to lower opex and higher non-interest income

Key MetricsGNPA 2,690.3 2,788.1 1,983.9 35.6 2,655.4 1.3 GNPA improved 5 bps QoQ to 2.3% NNPA 1,110.8 1,214.3 898.1 23.7 1,167.6 -4.9 NNPA improved 9 bps at 0.96%

Total Restructured assets 346.0 41.7 159.1 117.5 403.0 -14.1 Standard RA at | 346 crore of which | 202 crore is from ING Vysya Bank

Source: Company, ICICIdirect.com Research Change in estimates

(| Crore) Old New % Change Old New % Change CommentsNet Interest Income 6,594.9 6,957.2 5.5 7,288.4 7,958.9 9.2Pre Provision Profit 3,874.7 4,169.6 7.6 4,322.1 4,852.8 12.3NIM (%) 3.6 3.9 34 bps 3.5 4.0 51 bps

PAT 1,932.4 2,120.8 9.7 2,331.2 2,586.5 11.0PAT estimate revised upwards led by lower opex and higher traction in non-interest income

ABV (|) 121.2 124.6 2.8 132.3 137.9 4.2

FY16E FY17E

Source: Company, ICICIdirect.com Research Assumptions

FY14 FY15 FY16E FY17E FY16E FY17E Comments

Credit growth (%) 9.4 24.8 83.2 16.3 92.5 18.7

Deposit growth (%) 15.8 26.7 86.9 18.4 97.9 19.9

CASA ratio (%) 32.5 35.4 35.5 35.5 35.8 35.5NIM calculated (%) 4.5 4.5 3.9 4.0 3.6 3.5

Cost to income ratio (%) 49.7 52.1 57.1 56.6 59.0 59.2Reduced C/I estimate in anticipation of lower incremental opex owing to synergy benefit

GNPA (| crore) 1,703.8 2,010.4 2,920.7 3,389.0 3,173.7 3,891.8NNPA (| crore) 675.7 779.8 1,237.7 1,438.1 1,488.0 1,854.6Slippage ratio (%) 1.6 1.0 1.1 1.0 1.3 1.2Credit cost (%) 0.4 0.3 0.8 0.7 0.8 0.5 Management guidance at 80 bps for credit cost for FY16E

Current Earlier

Source: Company, ICICIdirect.com Research


Company Analysis Business aspects Kotak Mahindra Bank has a presence across all financial verticals, namely banking, securities, investment banking, asset management, consumer finance and life insurance. The company has a diversified product offering and has an experienced management. In the past six years, credit and deposit CAGR has been 26% and 29%, respectively, to | 66161 crore and | 74860 crore by FY15, higher than industry averages. Kotak Bank has largely been a retail lender with 64% of its loan book in retail in FY10. It has now moderated to 44% in FY15. In FY15, credit grew 24.8% YoY and deposits 26.7% YoY. In FY15, advances growth recovered with corporate banking loans surging 26% YoY while overall growth was 24.8% YoY to | 66161 crore. Ex CV/CE, growth was 28.2% YoY. Deposits grew a strong 26.7% YoY to | 74860 crore. Post merger, Kotak Banks loan book was at | 115345 crore with alteration in composition of loan portfolio, retail advances proportion declining to ~42% from 50%. Going ahead, we expect credit offtake at 13.7% CAGR in FY15-17E to | 140996 crore. Exhibit 1: On YoY basis healthy business growth

8885

6

9510

1

1005

06

1051

98

1091

55

1036

14

1116

62

1153

45

1211

89 1409

96

1002

89

1036

76

1127

55

1190

18

1229

68

1168

12

1232

12

1309

39

1398

80 1656

61

0

30000

60000

90000

120000

150000

180000

FY14

Q1FY

15

Q2FY

15

Q3FY

15

FY15

Q1FY

16

Q2FY

16

Q3FY

16

FY16

E

FY17

E

(| c

rore

)

Advances Deposits

[

Source: Company quarterly earnings update , ICICIdirect.com Research

Retail loans now constitute ~42.2% of total credit in standalone whereas due to auto loans of Kotak Prime, in consolidated, retail forms ~43% of total credit of | 125522 crore as on FY15.

Exhibit 2: Loan book movement over the years (standalone) | crore Q2FY14 Q3FY14 FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Growth yoy (%)CVs and contruction eqmt. 6781 6005 5441 5104 5062 5027 5204 5626 6123 6550 30.3Personal Loans incl small busines 3082 3156 4632 4723 5301 5929 6263 7429 8171 8813 48.6Home loans 11307 11454 12100 12312 12894 13738 14709 20756 21697 22327 62.5Corporate banking 14759 16621 14337 18568 21140 22044 20299 31205 33909 35239 59.9Agricultural finance 7910 9023 10468 9941 10137 10849 12106 15268 17112 16811 55.0Others 6770 6890 6010 706 759 7054 1158 1854 2034 2223 -68.5Total 50609 53149 52988 56922 55293 64641 66161 103614 111662 115345 78.4


KMB earned the best NIM in the industry at 4.7-5% led by high yielding retail loans and working capital corporate loans. NII has grown from | 1858 crore in FY10 to | 4224 crore by FY15 supported by strong credit and savings deposit growth. Post merger, NIM has declined to 4.2% in Q1FY16, owing to a decline in proportion of high yield retail credit and higher interest outgo on saving account of ING Vysya Bank. However, in Q2FY16, NIM improved 12 bps QoQ due to lower cost of deposit led by higher accretion in CASA at 36.2%. In Q3FY16, NIM continued to remain

Going ahead, the management has guided ~15% growth in

advance in FY16E

.


steady at 4.3%. Going ahead, change in loan mix is expected to keep blended margins at current levels. However, owing to faster addition to saving account and substantial proportion of fixed rate book with southward movement in interest rates, we expect NIM to remain broadly near ~4% in FY16-17E. Further, as integration benefits unfold with proportion of retail advances rising in overall book, NIMs are expected to revive and inch up, currently not factored by us. Exhibit 3: Increase in NIM led by higher CASA accretion

4.74.8

4.74.6 4.6 4.6

4.84.9 4.9 4.9

5.0 5.0

4.74.8

4.24.3 4.3

4.0

4.2

4.4

4.6

4.8

5.0

5.2

Q3FY

12

Q4FY

12

Q1FY

13

Q2FY

13

Q3FY

13

Q4FY

13

Q1FY

14

Q2FY

14

Q3FY

14

Q4FY

14

Q1FY

15

Q2FY

15

Q3FY

15

FY15

Q1FY

16

Q2FY

16

Q3FY

16

(%)

Series1

Source: Company quarterly earnings update, ICICIdirect.com Research

Deposit franchise (branches) build-up gradually enabled KMB to maintain healthy margins of >4.5% since FY08 despite a challenging environment. In the past two or three years due to higher focus on savings deposits, CASA has been stable at 31% wherein other banks saw a decline in CASA. The combined branch network post merger is at 1298 as of December 2015. With strong CASA deposits growth at 24% YoY to | 44657 crore, branches are expected to deliver a strong performance over time. Initial cost is incurred on employees and set-up upfront. We expect deposits to grow at 16.1% CAGR to | 165661 crore in FY17E. Exhibit 4: Branch network grows to 1298 branches to support CASA accretion

0

200

400

600

800

1000

1200

1400

Q2FY

11

Q3FY

11

Q4FY

11

Q1FY

12

Q2FY

12

Q3FY

12

Q4FY

12

Q1FY

13

Q2FY

13

Q3FY

13

Q4FY

13

Q1FY

14

Q2FY

14

Q3FY

14

Q4FY

14

Q1FY

15

Q2FY

15

Q3FY

15

Q4FY

15

Q1FY

16

Q2FY

16

Q3FY

16

`



Other income growth remains strong Non interest income has grown 44.9% to | 2028 crore in FY15. Core fee income and treasury gains enabled the bank to achieve stronger other income. Q3FY16 saw muted YoY increase of 3.2% in non interest income to | 722 crore, post a decline in Q2FY16 due to one-time impact of | 62 crore related to an account of credit event of a derivative customer. Also, a change in mutual fund fees recognition from upfront to over the life, has led to lower fee income. We expect non-interest income traction to remain slower in FY16E and then pick up in FY17E. Hence, we expect 4.6% CAGR in FY16-17E to | 3213 crore. Strong management, business model and controlled asset quality KMBs asset quality has been one of the most stable with NNPA ratio of ~1% and negligible restructured assets. This depicts the strong operational business model of the bank and the management having full control.

Exhibit 5: NPA levels maintained at comfortable levels

1.6 1.5 1.6 1.6 1.6 1.5 1.6

2.0 2.0 2.0 2.0 1.9 1.9 1.9 1.9

2.3 2.4 2.3 2.4 2.4

0.6 0.6 0.60.8 0.8 0.6 0.6

1.0 1.0 1.1 1.1 1.0 1.0 1.0 0.9 1.0 1.1 1.0 1.0 1.0

-0.2

0.2

0.6

1.0

1.4

1.8

2.2

2.6

3.0Q2

FY12

Q3FY

12

Q4FY

12

Q1FY

13

Q2FY

13

Q3FY

13

Q4FY

13

Q1FY

14

Q2FY

14

Q3FY

14

Q4FY

14

Q1FY

15

Q2FY

15

Q3FY

15

FY15

Q1FY

16

Q2FY

16

Q3FY

16

FY16

E

FY17

E

(%)

GNPA NNPA


GNPA surged QoQ by ~40 bps at 2.3% in Q1FY16 owing to merger related incremental addition of stressed assets. Kotak Mahindra Bank has identified total stress to the tune of 6% in erstwhile ING Vysya Banks book, which constitutes 2.5% of the merged entity. In Q3FY16, asset quality remained resilient with GNPA at 2.3%, a sequential improvement of 5 bps. Standard restructured loans were at | 346 crore (0.3% of net advances) owing to | 202 crore from the erstwhile ING Vysya Bank. We expect GNPA and NNPA ratios to remain broadly stable at 2.4% and 1.0%, respectively, by FY17E. Credit cost is expected to remain higher at 80 bps (annualised) in FY16E and then come down at 0.5% (annualised) in FY17E (management indicates additional 50 bps credit cost on account of integration).

Kotak Bank has identified total stress to the tune of 6% in

erstwhile ING Vysya Banks book, which constitutes 2.5%

of the merged entity


Healthy performance of consolidated entity Exhibit 6: Consolidated profit over the years, ex-bank other subsidiaries form ~35% of PAT Q3FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16Kotak Bank 276 282 280 362 436 403 353 340 407 430 626 611 527 191 570 635Kotak Securities 24 23 40 38 *13 31 40 46 44 68 66 60 96 67 78 55Kotak Mahindra Capital 4 6 4 2 4 4 -2 7 5 -4 -7 -6 30 3 7 6Kotak Prime 104 94 114 105 119 117 125 123 126 120 125 120 143 119 127 126Kotak AMC & Trust 3 4 -5 11 2 7 17 12 4 0 -1 -10 -18 20 23 4International Subsidiaries -4 -5 8 5 -1 -10 1 9 6 7 13 14 18 25 32 26Kotak Investment advisors 7 8 9 6 8 1 4 7 5 8 4 2 11 0 0 -1Kotak Mahindra Investments 3 4 16 8 5 4 11 11 16 17 25 24 40 30 36 39Kotak Mahindra Old Mutual 47 32 47 53 58 71 44 60 65 49 52 51 76 66 48 60Total (net off aflliates/minority) 464 443 502 577 666 627 583 591 678 695 899 863 913 518 942 949


Exhibit 7: Profitability performance at consolidated level PAT (| crore) Q3FY16 Q3FY15 YOY (%) Q2FY16 QoQ (%)Kotak Bank 634.7 611.2 3.8 569.5 11.5Kotak Securities 55.0 60.0 -8.3 78.0 -29.5Kotak Mahindra Capital 6.0 -6.0 NA 7.0 NAKotak Prime 126.0 120.0 5.0 127.0 -0.8Kotak AMC & Trust 4.0 -10.0 NA 23.0 NAInternational Subsidiaries 26.0 14.0 NA 32.0 -18.8Kotak Investment advisors -1.0 2.0 NA 0.0 NAKotak Mahindra Investments 39.0 24.0 62.5 36.0 8.3Kotak Mahindra Old Mutual 60.0 51.0 17.6 48.0 25.0Total (net off equity aflliates/minority) 948.7 862.6 10.0 941.5 0.8


Kotak Prime The overall loan book has increased nearly four times in seven years from | 5615 crore to | 21851 crore in Q3FY16. Kotak Prime, the next highest profit making segment, witnessed loan growth of 14.6% YoY to | 21851 crore in Q3FY16 while car loans within the same grew 15.4% YoY to | 16432 crore, thereby running down erstwhile real estate exposure. PAT came in flat QoQ and grew 5% YoY at | 126 crore. Exhibit 8: Kotak Mahindra Prime profitability on slower track

| Crore Q3FY16 Q2FY16 Q3FY15 YoY Gr. (%) QoQ Gr. (%)PBT 193.0 195.0 183.0 5.5 -1.0PAT 126.0 127.0 120.0 5.0 -0.8Loans 21851.0 20013.0 19073.0 14.6 9.2-car loans in same 16432.0 15754.0 14234.0 15.4 4.3CAR (%) 18.3 18.3 - -ROA (%) 2.5 2.5 - -NET NPA -cars (%) 0.4 0.4 - -


Exhibit 9: Kotak Prime second highest profit contributor

Q3FY16 Q2FY16 Q1FY16 Q4FY15 Q3FY15 Q2FY15 Q1FY15 Q4FY14 Q3FY14 Q2FY14 Q1FY14 Q4FY13 Q3FY13 Q2FY13 Q1FY13

PBT 193 195 183 218 183 190 183 192 190 191 179 174 158 170 139

PAT 126 127 119 143 120 125 120 126 123 125 117 119 105 114 94

Loans 21851 20013 19728 19707 19073 18819 17693 17371 16858 16952 17093 17022 16042 15173 14114

-car loans 16432 15754 15070 14726 14234 13946 13418 13273 13066 13136 13055 12777 12237 11756 11154

CAR 18.3 18.3 18.3 18.3 17.3 17.7 17 17.7 17.1 16.4 16 15.4 15.8 15.8 15.9

ROA 2.5 2.5 2.5 2.5 2.3 2.5 2.5 2.6 2.6 2.6 2.5 2.6 2.4 2.8 2.4

Net NPA -cars 0.40% 0.44% 0.5% 0.4% 0.4% 0.3% 0.3% 0.3% 0.4% 0.3% 0.2% 0.2% 0.2% 0.2% 0.1%



Kotak Securities Kotak Securities (K-Sec), a KMB subsidiary, has been one of the large stock broking firms offering both retail and institutional services. It had 9% market share in FY07, which declined to as low at 2.7% currently on account of rising options volume generating lower yields and relative lower push by the broker in the same. The company clocked an average daily turnover of | 3,720 crore in FY07 and was at | 3920 crore in FY14, which rose to | 7593 crore in Q2FY16 on the back of increased volumes in the industry. However, in Q3FY16, market volumes remained weak with Kotaks daily turnover at | 6481 crore. The end of the JV with Goldman Sachs in May 2006 has not made any meaningful impact on its market share. Competition intensified in the recent past in the Indian broking space, which resulted in a fall in broking yields for all players. Exhibit 10: Average daily turnover trend

3600

3925

4522

5205

4648 3582

4261

4160

4137

3300

3343

3673

3814

3692

4248

3720

3903

6053

6621

8372

8372

7813

7593 6481

1000

2000

3000

4000

5000

6000

7000

8000

9000Q4

FY10

Q1FY

11

Q2FY

11

Q3FY

11

Q4FY

11

Q1FY

12

Q2FY

12

Q3FY

12

Q4FY

12

Q1FY

13

Q2FY

13

Q3FY

13

Q4FY

13

Q1FY

14

Q2FY

14

Q3FY

14

Q4FY

14

Q1FY

15

Q2FY

15

Q3FY

15

Q4FY

15

Q1FY

16

Q2FY

16

Q3FY

16

(| C

rore

)


Exhibit 11: Market share in average daily volume surges in Q2FY16 (reported)

3.93.8 3.7

3.8

3.5

3.0

2.7

2.9 2.9 2.9

2.5 2.52.6

2.5

2.22.4

2.32.4

2.92.7

2.82.852.7 2.7 2.7

22.22.42.62.8

33.23.43.63.8

4

Q3FY

10

Q4FY

10Q1

FY11

Q2FY

11Q3

FY11

Q4FY

11

Q1FY

12Q2

FY12

Q3FY

12Q4

FY12

Q1FY

13Q2

FY13

Q3FY

13Q4

FY13

Q1FY

14

Q2FY

14Q3

FY14

Q4FY

14Q1

FY15

Q2FY

15

Q3FY

15Q4

FY15

Q1FY

16Q2

FY16

Q3FY

16

(%)


In Q3FY16, Kotak Securities topline remained muted at 2.2% YoY to | 228 crore, on lower daily volume of | 6481 crore vs. | 8372 crore in Q3FY15. PAT came in at | 55 crore, a decline of 8.3% YoY owing to lower topline during the quarter. Kotak Mahindra Old Mutual Life Insurance is a 74:26 JV between Kotak Mahindra Bank and Old Mutual Life. Kotak Life had managed to capture market share of ~3%. It recorded 74% CAGR in annualised premium equivalent (APE) over FY04-07. Post FY09, after which growth collapsed,

The market share of Kotak Securities remained at 2.7% in

Q3FY16


annualised premium equivalent (APE) has been hovering around | 1000 crore till now. Annual profits touched around | 229 crore as on FY15 growing from | 14 crore in FY09. The life insurance performance has stabilised with traction returning in terms of new business premium accretion. After de-growing in FY14, new business premium surged 38.7% YoY in Q3FY16 to | 418.5 crore. Q3FY16 PAT was at | 60 crore led by strong individual premium growth.

Exhibit 12: Life insurance business statistics on APE basis market share at 48%

Premium (| crore) Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15

Renewal 527.0 240.0 337.0 350.0 571.0

Indvl Regular 186.0 58.0 111.0 133.0 301.0 124.0 202.0 211.0

Group 205.0 134.0 170.0 159.0 328.0 248.0 239.0 205.0

Single 88.0 26.0 50.0 26.0 46.0 16.0 20.0 25.0

New Business Premium 479.0 218.0 331.0 318.0 675.0 388.0 461.0 441.0

APE 399.8 194.6 286.0 294.6 633.6 373.6 443.0 418.5

Solvency Ratio (%) 3.2 3.1 3.0 3.0 3.1 3.2 3.2 3.2PAT 65.0 49.0 52.0 51.0 76.0 66.0 48.0 60.0


Kotak Mahindra Asset Management Kotak AMC has grown its average AUM at 21% CAGR to | 38600 crore by FY07-15. Its share of equity in total has been rising gradually from 14% in FY09 to 24% in FY14. In Q3FY16, average AUM grew 41.1% YoY to | 55133 crore. However, PAT got hit at | 4 crore in Q3FY16, owing to a one-time operational loss during the quarter. Kotak Mahindra Capital (KMCC) The Kotak Mahindra Group carries on its investment banking business through Kotak Mahindra Capital Company (KMCC), a subsidiary of Kotak Mahindra Bank (KMB). Kotak bought the 25% stake held by Goldman Sachs in KMCC in May 2006 by paying | 210 crore, making it a 100% subsidiary. KMCC has a strong presence in managing equity issuances and advising on M&A transactions and has benefited largely from the boom in investment banking activity in India. The company de-merged its principal and trading investments division (including primary dealership) in March 2007 (to free up surplus capital) and now primarily operates as a full service investment bank, offering advisory and transactional services. It earned revenue of | 28 crore and PAT of | 6 crore in Q3FY16.

On APE (Single @ 1/10th) basis, Kotak Banks share for

Q3FY16 is 48% (Q3FY15 34%) for first year individual

premium


Outlook and valuation KMB has been trading at rich valuations consistently due to its superior return ratios with FY15 RoA of 1.9%. It earns highest NIM in the industry. This depicts its strong operational business model and management having full control via consistent performance. With the ING Vysya Bank merger, the bank brought down the promoter stake from 40% to 34% and also added value and geographical synergies in the company. For the merged entity, NIMs and RoA are expected to remain at steady at ~4% and 10.3% in FY17E, and will continue to remain better than peers. Factoring in higher-than-expected bottomline, check on integration expense and prudent asset quality, we have marginally revised our FY16-17E estimates upwards. With business synergies expected to gain further traction, we maintain our target price at | 677, valuing the stock on SOTP basis. Maintaining the multiple at 4.0x for the bank, we maintain HOLD rating.

Exhibit 13: DuPont Analysis (Bank standalone) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E

Net interest income/ avg. total assets 5.1 5.3 5.6 4.8 4.3 4.6 3.8 3.8 3.8 3.8Non-interest income/ avg. total assets 1.9 1.0 1.9 1.8 1.7 1.8 1.6 1.8 1.5 1.5Non-operating profit/ avg. total assets 7.0 6.3 7.5 6.5 6.0 6.5 5.4 5.6 5.3 5.3Operating expenses/ avg. total assets 4.2 4.2 3.6 3.5 3.1 3.4 2.8 3.0 3.0 3.0Operating profit/ avg. total assets 2.8 2.1 3.9 3.0 2.8 3.1 2.6 2.6 2.3 2.3Provisions/ avg. total assets 1.1 0.6 1.5 0.3 0.1 0.3 0.3 0.3 0.5 0.5Return on avg. total assets 1.2 1.0 1.7 1.9 1.9 1.9 1.5 1.5 1.1 1.2Leverage 9.3 7.8 8.0 7.8 7.9 9.3 8.6 7.9 8.1 8.4Return on equity 11.4 7.5 13.5 14.5 14.7 17.9 13.0 12.1 9.3 10.3


Exhibit 14: Valuation FY14 FY15 FY16E FY17E

EPS (|) 9.4 13.6 11.7 14.2Growth (%) 1.2 44.6 -14.4 22.0P/E (x) 75.0 51.9 60.6 49.7ABV 81.3 114.8 124.6 137.9P/ABV (x) 8.6 6.1 5.6 5.0GNPA (%) 1.9 1.8 2.4 2.4RoNA (%) 1.5 1.5 1.1 1.2RoE (%) 13.0 12.1 9.3 10.3


Exhibit 15: Valuation (|) Merged Entity Company Value / share

KMB (Merged entity) 551

Kotak Life 23

Kotak Mahindra Prime 59

Kotak Mahindra Capital 11

Kotak Securities 29

Kotak AUM 12

686



Details about merger with ING Vysya Bank (September 2014) Effective April 1, 2015, ING Vysya Bank will merge with Kotak Bank as it has received Competition Commission of India (CCI) and RBI approval for an all-stock amalgamation among the banks. Post merger, Kotak Mahindra Bank will become the fourth largest private bank with branches at 1261, business size of | 230000 crore, employees at ~40000 and customers at ~10 million. With ~15.2% dilution of equity share capital, promoter holding in Kotak Mahindra Bank is expected to decline to 34% from 40% currently, in line with RBIs direction to bring down their holding to 30% by December 2016 and 20% by March 2018. Rationale for deal 1. The merger would give Kotak Bank a deeper presence in southern

India as ING Vysya has two-third of its 577 branches in south. Kotak Bank has 79% of its 684 branches in western & northern region. Thus, the merger provides larger presence with minimum overlap

2. The merger would yield more liquidity with significant foreign headroom in Kotak Bank even post merger, with foreign shareholding at ~47% in the merged entity. The management indicated that they will apply to RBI for raising the foreign holding limit to 74% from 49% currently

3. The merger will allow Kotak Bank to leverage on large international corporates in India with access to overseas relationships of ING Group

4. The merger is also beneficial on the liability front as both banks have CASA ratio of ~31%. Owing to the strong SME business, ING Vysyas CA float is healthy. Further, there is large scope for garnering savings balances as Kotak Bank offers a higher rate of 5.5-6%

Owing to lower NIMs and higher CI ratio of ING Vysya Bank, Kotaks banking business RoA is expected to decline to ~1.0% from 1.8% immediately. RoA can further be maintained at 1.0% in FY15-17E. However, we believe the benefits of merger synergies will accrue over time, which will enable the merged entity to clock healthy return ratios post FY17E. Exhibit 16: Combined branch network (FY15) status (Total ~1261) Branches ING Vysya Kotak Bank Kotak (Merged)West 13% 46% 31%North 22% 33% 28%South 61% 15% 36%East 4% 6% 5%


Exhibit 17: Advances mix (Q3FY15) % ING Kotak Bank MergedAgri 11 12 12SME 38 7 17Large corporates 39 31 33Retail 19 50 40


Merged entity will have 441 branches in the Top 8 cities


Company snapshot

0

100

200

300

400

500

600

700

800

Jan-

05

May

-05

Sep-

05

Jan-

06

May

-06

Sep-

06

Jan-

07

May

-07

Sep-

07

Jan-

08

May

-08

Sep-

08

Jan-

09

May

-09

Sep-

09

Jan-

10

May

-10

Sep-

10

Jan-

11

May

-11

Sep-

11

Jan-

12

May

-12

Sep-

12

Jan-

13

May

-13

Sep-

13

Jan-

14

May

-14

Sep-

14

Jan-

15

May

-15

Sep-

15

Jan-

16

May

-16

Sep-

16

Jan-

17

Target Price: | 677

Source: Bloomberg, Company, ICICIdirect.com Research

Key events Date EventMar-03 Promoter stake was at 63% in the bank, post incorporation in 2002May-05 Announced bonus sharesMay-07 In peak market, capital market related businesses were doing well and getting higher valuation multiples. Bank's market cap share in total market used tobe less

FY08 Announced stock split, FV reduced to 5 from 10

Jun-09 Anand Mahindra ceased to be a promoter of the bankFeb-11 Bank aspired to be national, inorganic (route) is something that was on radar also. Thereafter, the stock saw a new rally and is rising continuouslyOct-11 Savings rate de-regulated by RBI, Kotak Bank offered higher interest rate of 6% above | 1 lakh and 5% below | 1 lakh vs the floor of 4%. This has been very helpful in

saving balance increase as it started adding | 600-800 crore in a quarter post this hike.Mar-12 Asset quality maintained even with a large commercial vehicle and construction equipment portfolio

Jul-12 RBI asked promoters of Kotak Mahindra Bank to cut their stake in the bank to 20% from 45 % by 2018. With expectation of continuous dilution at higher multiple of BV, stock price remained on an uptrend

May-13 G-sec yields spiked post Fed announcement on May 22 of its intention to taper QE and tight liquidity measures by RBI of MSF rate hike etc, impacted banks, particularly wholesale funded however Kotak Bank although being lower on CASA remained resilient

Oct-13 Post liquidity tightening measures like MSF reversed by RBI, stock saw respite

Nov-14 Announced merger with ING Vysya Bank in ratio of 725 shares of Kotak bank for 1000 shares of ING Vysya BankJan-15 Merger approved by shareholdersApr-15 Scheme of amalgamation of Kotak Mahindra Bank and ING Vysya Bank comes into effect from April 1, 2015


Top 10 Shareholders Shareholding Pattern Rank Name Latest Filing Date % O/S Position (m) Change (m)1 Kotak (Uday Suresh) 30-Sep-15 33.45 613.2 0.62 ING Bank N.V. 30-Sep-15 6.43 117.9 0.03 Capital International, Inc. 30-Sep-15 5.92 108.5 1.44 Capital World Investors 30-Sep-15 5.89 108.0 1.15 CPP Investment Board 30-Sep-15 3.91 71.7 0.06 Sumitomo Mitsui Banking Corp 30-Sep-15 3.58 65.6 0.07 Capital Research Global Investors 30-Sep-15 2.89 53.0 13.68 Stewart Investors 30-Sep-15 2.30 42.2 5.29 Genesis Investment Management, LLP 30-Nov-15 1.93 35.3 0.010 Caladium Investments Pte. Ltd. 30-Sep-15 1.59 29.2 -0.8

(in %) Jun-14 Sep-14 Dec-14 Jun-15 Sep-15Promoter 40.33 40.07 40.05 33.86 33.77FII 35.09 34.61 35.09 35.32 34.67DII 1.78 2.01 2.03 3.69 4.22Others 22.80 23.31 22.66 27.13 27.34

Source: Reuters, ICICIdirect.com Research

Recent Activity (| crore and shares in mn)

Investor name Value Shares Investor name Value SharesING Bank N.V. ,284.59m 117.90m Caladium Investments Pte. Ltd. -108.96m -10.00m Capital International, Inc. 377.43m 34.64m Matthews International Capital Management, L.L.C. -81.72m -7.50m Capital Research Global Investors 211.08m 19.37m Lyxor Asset Management -33.55m -3.31m Birla Sun Life Asset Management Company Ltd. 91.63m 8.35m Kotak Mahindra Asset Management Company Ltd. -28.36m -3.20m Norges Bank Investment Management (NBIM) 37.83m 3.77m First State Investment Management (UK) Limited -27.44m -3.08m

Buys Sells

Source: Reuters, ICICIdirect.com Research


Financial summary Profit and loss statement | Crore

(Year-end March) FY14 FY15 FY16E FY17EInterest Earned 8767.1 9719.9 16790.5 19061.2Interest Expended 5047.1 5496.1 9833.3 11102.3Net Interest Income 3720.0 4223.8 6957.2 7958.9growth (%) 16.0 13.5 64.7 14.4Non Interest Income 1399.7 2028.4 2760.9 3212.8Net Income 5119.8 6252.2 9718.1 11171.7Operating expense 2542.7 3254.7 5548.5 6318.9Gross profit 2577.1 2997.5 4169.6 4852.8Provisions 304.7 164.5 1004.3 992.3Taxes 770.0 966.9 1044.6 1274.0Net Profit 1502.4 1866.1 2120.8 2586.5growth (%) 10.4 24.2 13.6 22.0EPS 19.5 12.1 11.7 14.2


Key Ratios (Year-end March) FY14 FY15 FY16E FY17EValuationNo. of Equity Shares 77.0 154.5 181.7 181.7EPS (|) 19.5 12.1 11.7 14.2BV (|) 159.4 91.3 131.4 145.8BV-ADJ (|) 151.9 87.4 124.6 137.9P/E 71.2 114.9 60.6 49.7P/BV 9.1 15.9 5.7 5.1P/ABV 9.0 15.6 5.6 5.0Yields & Margins (%)Yield on avg earning assets 10.6 10.4 9.5 9.6Avg. cost on funds 6.9 6.8 6.3 6.1Net Interest Margins 4.5 4.5 3.9 4.0Avg. Cost of Deposits 6.9 6.7 6.1 6.1Yield on average advances 13.2 12.5 11.3 11.5Quality and Efficiency (%)Cost / Total net income 49.7 52.1 57.1 56.6Credit/Deposit ratio 89.8 88.4 86.6 85.1GNPA 2.0 1.9 2.4 2.4NNPA 1.1 0.9 1.0 1.0ROE 13.8 14.1 9.3 10.3ROA 1.8 1.9 1.1 1.2


Balance sheet | Crore (Year-end March) FY14 FY15 FY16E FY17ESources of FundsCapital 385.2 386.2 454.2 454.2ESOPS 8.5 3.0 8.5 8.5Reserves and Surplus 11889.9 13722.6 23415.9 26027.1Networth 12283.5 14111.8 23878.5 26489.7Deposits 59072.3 74860.4 139879.8 165660.9Borrowings 12895.6 12149.8 23777.2 28092.7Other Liabilities & Provisions 3333.8 4858.1 7832.0 8335.7Total 87585.2 105980.0 195367.6 228579.1

Applications of FundsFixed Assets 1106.9 1206.7 1917.7 2062.0Investments 25484.5 30422.1 53205.8 58918.7Advances 53027.5 66160.5 121188.7 140996.2Other Assets 1972.3 1928.4 7060.5 12991.1Cash with RBI & call money 5979.9 6262.4 11994.9 13611.1Total 87571.1 105980.0 195367.6 228579.1


Growth ratios (Year-end March) FY14 FY15 FY16E FY16ETotal assets 4.6 21.0 84.3 17.0Advances 9.4 24.8 83.2 16.3Deposits 15.8 26.7 86.9 18.4Total Income 10.5 15.6 66.4 13.9Net interest income 16.0 13.5 64.7 14.4Operating expenses 15.1 28.0 70.5 13.9Operating profit 30.7 16.3 39.1 16.4Net profit 10.4 24.2 13.6 22.0Book value 29.9 14.9 43.9 10.9EPS 7.0 -38.1 -3.4 22.0



ICICIdirect.com coverage universe (Banks) CMP M Cap(|) TP(|) Rating (| Cr) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E

Bank of India (BANIND) 94 116 Sell 7,422 26 -3 16 3.6 NA 5.7 0.4 0.7 0.6 0.3 0.0 0.2 6 -1 4Bank of Baroda (BANBAR) 127 172 Hold 29,415 15 16 20 8.3 8.1 6.4 0.9 1.0 0.8 0.5 0.5 0.5 9 9 10Punjab National Bank (PUNBAN) 93 130 Hold 16,800 17 18 25 5.6 5.3 3.7 0.8 0.7 0.6 0.5 0.5 0.7 8 8 11State Bank of India (STABAN) 185 300 Buy 137,855 18 19 22 10.5 9.9 8.6 1.4 1.2 1.1 0.7 0.7 0.7 11 10 11Indian Bank (INDIBA) 91 184 Buy 3,903 21 23 29 4.3 4.0 3.1 0.4 0.4 0.4 0.5 0.5 0.6 7 7 9Axis Bank (AXIBAN) 389 600 Buy 92,461 31 35 42 12.5 11.2 9.3 2.1 1.8 1.5 1.7 1.7 1.7 18 17 17City Union Bank (CITUNI) 81 105 Buy 4,818 6 7 8 12.5 11.3 9.9 2.0 1.7 1.5 1.4 1.4 1.5 16 15 15DCB Bank (DCB) 74 72 Hold 1,917 7 6 7 10.9 11.7 10.5 1.5 1.3 1.2 1.3 1.0 1.0 15 11 11Federal Bank (FEDBAN) 49 45 Sell 8,349 6 5 5 8.3 10.3 9.0 1.1 1.1 1.0 1.3 0.9 0.9 14 10 11HDFC Bank (HDFBAN) 1,028 1,220 Buy 256,875 41 49 61 25.2 20.9 16.8 4.2 3.6 3.1 1.9 1.9 1.9 19 18 19IndusInd Bank (INDBA) 898 1,000 Hold 52,312 34 39 50 26.5 22.8 18.1 4.6 3.0 2.7 1.8 1.9 2.0 18 16 15Jammu & Kashmir Bk(JAMKAS) 69 95 Hold 3,345 10 17 21 6.6 4.0 3.3 0.7 0.6 0.6 0.7 1.0 1.1 9 13 14Kotak Mahindra Bank (KOTMAH) 670 677 Hold 122,481 14 12 14 49.1 57.3 47.0 5.8 5.4 4.9 1.5 1.1 1.2 12 9 10South Indian Bank (SOUIN0) 18 23 Hold 2,475 2 3 3 8.0 6.8 5.8 0.8 0.8 0.7 0.5 0.6 0.6 9 10 11Yes Bank (YESBAN) 673 850 Buy 28,196 48 57 67 14.0 11.8 10.1 2.4 2.1 1.8 1.6 1.6 1.6 21 19 19

Sector / CompanyRoE (%)EPS (|) P/E (x) P/ABV (x) RoA (%)



RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey Head Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai 400 093

[email protected]


ANALYST CERTIFICATION We /I, Kajal Gandhi, CA, Vasant Lohiya, CA and Vishal Narnolia, MBA Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.

Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a Sebi registered Research Analyst having registration no. INH000000990. ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities is a wholly-owned subsidiary of ICICI Bank which is Indias largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. (associates), the details in respect of which are available on www.icicibank.com. ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on a reasonable basis, ICICI Securities is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction. ICICI Securities or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the companies mentioned in the report in the past twelve months. ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts have any material conflict of interest at the time of publication of this report. It is confirmed that Kajal Gandhi, CA, Vasant Lohiya, CA and Vishal Narnolia, MBA, Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. ICICI Securities or its subsidiaries collectively or Research Analysts do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this report. It is confirmed that Kajal Gandhi, CA, Vasant Lohiya, CA and Vishal Narnolia, MBA, Research Analysts do not serve as an officer, director or employee of the companies mentioned in the report. ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report. We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

kotak mahindra bank (kotmah) -...

Documents