CLSA increased their earnings estimate 19%-26% for FY21-23CL and lifted their target price to Rs 1600 from Rs 1,400. CLSA believes Kotak Bank is ready to press the growth pedal. All round Q2 FY21 beat and strong asset quality commentary indicates Kotak Bank’s Q2 FY21 performance beat estimates with core PPOP growth of 19% YoY, very strong asset quality commentary and finally, management’s comfort on pressing the growth pedal. Management indicated collections in many segments are approaching pre Covid-19 levels with overall collections in the mid 90s. After having built a best-in-class liability franchise, the bank is now looking to enhance its franchise on the asset side which should be a big positive as the bank has lagged peers on growth. With best in class underwriting and a strong liability franchise, and now its intent to grow makes Kotak Bank a steady compounder.

Strong commentary on asset quality:

Gross NPAs came in at 2.55%, and adjusting for court ruling on NPAs it would have been 2.7% versus 2.67% in Q1 FY21. Commentary on asset quality was very positive and management indicated overall collections for the bank has reached the mid-90% range with collections in secured retail assets reaching near pre-Covid-19 levels. The bank did not create any Covid-19 provisions in Q2 FY21 and management commented its Rs 12.8 bn in Covid-19 provisions (0.6% of loans) seems more than adequate. Commentary from both Kotak Bank on collections and credit costs provides comfort on asset quality outcomes.

Ready to press the growth pedal now:

Kotak Bank’s loan growth at 0.4% QoQ was modest again and the bank has lagged peer growth the past 6-7 quarters because of its cautious approach. The bank indicated that over the past 8-9 years the bank has built a strong liability franchise and it intends to enhance its retail asset customer origination engine. The bank is also more comfortable with the recovery now, & with its lowest cost of funds it intends to increase market share in secured retail products. CLSA factors in growth rising to 16%-18% in FY21-23CL.

Jefferies says Kotak Bank Q2 FY21 gives comfort on quality drives confidence to grow. Jefferies maintained their Buy call with SOTP based price target of Rs 1,700, including value of bank at 3.6x Sep-22 adjusted PB.

Key Takeaway from Kotak Bank’s Q2 FY21

Jefferies highlights that standalone profit of Rs 21.8 bn, +27% YoY, surprised positively with better topline & lower credit cost. Key positive was in management’s outlook that contingent provisions of 0.6% (of loans) are adequate for Covid-linked stress, so it didn’t make more such provisions in Q2. Comfort on asset quality will reflect in confidence to grow loans (-4% in Q2), as it leverages deposit franchise, CASA ratio at 57%.

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HDFC Securities believes Q2 FY21 earnings were significantly ahead of estimates, led by better than expected operating. In stating that current non specific provisions are more than adequate to cover the impact of COVID-19 and that it now sees significant potential for calibrated growth, the management was quite sanguine in its outlook. HDFC Securities have revised their earnings estimates upwards and maintain ADD rating with SoTP value of Rs 1,426.

ICICI Securities maintains BUY rating on Kotak Bank with target price of 1634, valuing at 3.9x FY22E.They say Kotak Mahindra Bank reported a good set of numbers on the operating front with profitability getting a boost from healthy margins, controlled cost and lower provisions. Though loan book growth remained flat sequentially, the management has indicated there would be a strategic shift in focus from maintaining strong liability franchisee to developing an asset base coupled with customer acquisition and engagement as well. On the asset quality front, performance was satisfactory with GNPA, NNPA ratio declining 15 bps, 23 bps QoQ to 2.55%, 0.64%, respectively. On a standstill asset qualification basis, asset quality remained stable with proforma GNPA at 2.70%.
Valuation & Outlook:
Kotak Bank’s long term focus continues on maintaining risk adjusted returns. With a shift in focus, ICICI Securities expects growth to pick up gradually in certain segments before gathering higher pace in the medium term. Adequate provision provides comfort to deal with volatility in asset quality. They think with levers present for sustained growth in earnings and the bank being well placed on the capital front to drive business growth, making it an attractive franchisee. Kotak Bank has been a consistent performer over the years, driven by reasonable RoE, high RoA ratios & strong margin profile. Hence, premium valuations for Kotak Banks are justified considering management’s strength and sustainability.


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