qfy18 kotak mahindra bank -...

20 July 2017

1QFY18 Results Update | Sector: Financials

Kotak Mahindra Bank

BSE SENSEX S&P CNX CMP: INR980 TP: INR1,153(+18%) Buy 31,904 9,873

Bloomberg KMB IN Equity Shares (m) 1,839 M.Cap.(INRb)/(USDb) 1,366.3 / 20.0

52-Week Range (INR) 1019 / 692 1, 6, 12 Rel. Per (%) -3/18/11 Avg Val, INRm 2001 Free float (%) 69.9 Financials & Valuations (INR b) Y/E March 2018E 2019E 2020E NII 93.9 112.1 135.3 OP 72.7 90.6 113.2 Cons. NP 61.7 78.1 96.6 Cons. EPS (INR) 32.4 41.0 50.8 EPS Gr. (%) 20.9 26.5 23.7 Cons. BV. (INR) 232 272 321 Cons. RoE (%) 15.0 16.3 17.1 RoA (%) 1.8 2.0 2.0 P/E(X) (Cons.) 30.2 23.9 19.3 P/BV (X) (Cons.) 4.2 3.6 3.1

Strong all-around performance; Merger synergies yielding results Standalone results: PAT grew 30% YoY to INR9.1b (in-line). Core operating

profit grew strongly by 30% YoY, led by healthy NII growth (17% YoY; NIMs strong at 4.5%), acceleration in fee income (+43% YoY) and pristine asset quality (stable GNPAs at 2.6%). KMB holds more than requisite provisioning in relation to its exposure of INR2.36b to the 12 accounts identified by the RBI for bankruptcy proceedings under NCLT (four accounts inherited from ING Vysya Bank). Loan growth came in at 18% YoY (+6% QoQ; +15% in 4QFY17), led by robust growth in CV (+6% QoQ, 35% YoY), corporate banking (+21/8% YoY/QoQ) and unsecured loans (+24/5% YoY/QoQ).

Other highlights: a) CASA ratio remained stable QoQ at 44%, despite moderation in CA deposits, led by robust SA mobilization (+44/6% YoY/QoQ). b) SMA2 increased 11bp QoQ to 0.21%; OSRL fell 21% to 6bp.

Other businesses: a) Profitability at its capital market business improved to INR1.3b (+57% YoY), led by 108% YoY PAT growth of K-Sec to INR1.25b. b) K-Sec market share declined 30bp QoQ to 1.9%. c) Overall AUM increased 8% QoQ (+37% YoY), led by strong inflows in equity AUM (+92% YoY).

Valuation and view: With the completion of merger integration with eIVBL, synergies are likely to flow in. Strong presence across geographies/products and healthy capitalization (T1 of ~19%) place the bank in a sweet spot to capitalize on growth opportunities and gain market share. KMB’s premium multiples are likely to sustain, considering strong growth and operating leverage available across businesses, and a clean loan portfolio. Comfort on asset quality remains the highest, with no SDR/5:25, negligible SMA2 (21bp) and OSRL (6bp). At our SOTP of INR1,153, KMB will trade at 4.2x 2019E consol. BV. Buy.

Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

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Kotak Mahindra Bank

20 July 2017 2

Exhibit 1: Quarterly performance v/s our estimates and reasons for deviations (INR m) Kotak Bank (standalone) 1QFY18A 1QFY18E v/s Est. Comments Net Interest Income 22,456 22,241 1

% Change (Y-o-Y) 17.0 15.9 Operating Profit 15,954 15,821 1

% Change (Y-o-Y) 21.3 20.3 Net Profit 9,127 9,188 -1

% Change (Y-o-Y) 23.0 23.8 Other Businesses Kotak Prime 1,320 1,400 -6 Modest Loan growth Kotak Mah. Investments 450 500 -10 Kotak Mah. Capital Co 50 120 -58 Sharp decline in profitability Kotak Securities 1,250 1,020 23 Sharp improvement in profitability International subs 170 250 -32 Sharp decline in profitability Kotak Mah. AMC & Trustee Co. 150 240 -38 Kotak Investment Advisors 0 40 Kotak OM Life Insurance 1,030 795 30 Sharp improvement in profitability Con.adj and MI -80 -50 Consol. PAT 13,467 13,503 0 % Change (Y-o-Y) 25.3 25.6

Source: MOSL, Company

Lending business: Healthy loan growth and strong key operating metrics; stable asset quality maintained Healthy loan growth; robust CASA growth continues On a standalone basis, loans grew 5% QoQ and 18% YoY, driven by robust

growth in CV segment (+6% QoQ, +35% YoY), followed by 24%/21% YoY growth in small business/corporate banking books.

KMPL’s PAT grew 3% QoQ (+10% YoY). Consolidated loan growth was at 19% YoY.

SA deposits grew 6% QoQ and 44% YoY. SA deposits as a proportion of overall deposits stood at 26.9% (21.8% a year ago). Overall CASA ratio was stable QoQ at 43.9%.

Strong NIMs, healthy fee income and controlled opex drive strong core performance Calculated NIM contracted 10bp QoQ, but increased 13bp YoY to 4.5% as robust

CASA growth led to 90bp YoY decline in calculated cost of funds from 6.23% to 5.33%.

Contribution of fee income to profitability remained high (+43% YoY), which, coupled with cost containment (+16% YoY), led to robust operating profit growth of 21% YoY.

Net stress loans remain one of the lowest in the system While challenges continue in the economy, KMB reported stable asset quality

performance, with net stress loans increasing only marginally by 9bp QoQ to 152bp (one of the lowest in the system).

The bank has negligible stress in the book in terms of OSRL (6bp) and SMA2 accounts (21bp), demonstrating the robust risk management of the bank.

Overall CASA ratio stood stable QoQ at 43.9%

Strong emphasis on digital initiatives is driving down cost structure of the bank

Net stress loans including SMA2 accounts at ~152bp

Kotak Mahindra Bank

20 July 2017 3

Healthy performance in non-lending business Capital market-related business PAT was at INR1.3b, driven by strong

profitability in the securities division. K-sec net profit increased 108% YoY to INR1.25b; its market share declined QoQ to 1.9%.

Asset management business reported PAT of INR320m, flat YoY. Overall AUM increased 6% QoQ (+37% YoY), led by strong inflows in equity AUM

of 13% QoQ (+92% YoY). Domestic AUM grew 13% QoQ and 61% YoY. Life insurance profit increased 45% YoY to INR1b.

Exhibit 2: Growth in auto loans was sluggish in the quarter


Exhibit 3: Domestic AUM increased 61% YoY (+13% QoQ)


Exhibit 4: K-Sec: PAT grew 108% YoY (INR b)


Exhibit 5: K-Sec market share declined 30bp QoQ to 1.9%


Exhibit 6: Investment banking earnings trend (INRm)


Exhibit 7: Kotak AMC: Equity AUMs trending higher (INRb)


122

128

131

131

131

133

134

139 14

2 14

7 15

1 15

8 16

4 16

7 16

8 17

2 17

3 18

2 18

4

38

42

49

46

38

47

51

49

48

50

47

43 54

56

54

61

62

70

93

9MFY

13FY

131Q

FY14

1HFY

149M

FY14

FY14

1QFY

151H

FY15

9MFY

15FY

151Q

FY16

1HFY

169M

FY16

FY16

1QFY

171H

FY17

9MFY

17FY

171Q

FY18

Auto Loans (INR b) Other Loans (INR b)

52 51 48 45 47 43 40 36 41 39 42 39 41 43 42 43 44

5 5 6 6 7 9 10 12 14 14 14 14 15 16 14 20 21 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 16 16 17 18 18 19 22 26 23 25 22 21 19 17 22 17 16 8 10 10 10 9 9 9 7 6 6 6 11 10 9 6 5 4 17 17 18 20 18 19 18 18 15 15 15 14 14 14 15 14 13

1QFY

141H

FY14

9MFY

14FY

141Q

FY15

1HFY

159M

FY15

FY15

1QFY

161H

FY16

9MFY

16FY

161Q

FY17

1HFY

179M

FY17

FY17

1QFY

18

Debt Equity PMSOffshore Funds Alternate assets Insurance

1.5 1.

6 1.

5 1.5

1.7 1.6

2.2

2.2

2.2 2.

9 2.

5 2.7

2.3

2.3 2.4

2.9

2.9 3.

7 3.

7

0.4

0.1

0.3

0.4

0.5

0.4

0.7

0.7

0.6

1.0

0.7

0.8

0.6

0.5

0.6

1.0 0.

9 1.

2 1.

3

26

8

26 27 28 30 29 27

33

27 29 24

23 25

33 30 33 34

3QFY

134Q

FY13

1QFY

142Q

FY14

3QFY

144Q

FY14

1QFY

152Q

FY15

3QFY

154Q

FY15

1QFY

162Q

FY16

3QFY

164Q

FY16

1QFY

172Q

FY17

3QFY

174Q

FY17

1QFY

18

Tot. Inc. PAT PATM (%)

2.5

2.2 2.4

2.3 2.3

2.9 2.7

2.8 2.9

2.7 2.7 2.7 2.6

2.4 2.3

2.2 2.2

1.9

4QFY

131Q

FY14

2QFY

143Q

FY14

4QFY

141Q

FY15

2QFY

153Q

FY15

4QFY

151Q

FY16

2QFY

163Q

FY16

4QFY

161Q

FY17

2QFY

173Q

FY17

4QFY

171Q

FY18

180 22

0 22

0 12

0 26

0 25

0 12

0 11

0 13

0 52

0 21

0 290

280 36

0 52

0 25

0 26

0 340

270

20

40

40

-20

70

50

-40

-70

-60

300

30 70

60

170 23

0 50

70

110

50

3QFY

134Q

FY13

1QFY

142Q

FY14

3QFY

144Q

FY14

1QFY

152Q

FY15

3QFY

154Q

FY15

1QFY

162Q

FY16

3QFY

164Q

FY16

1QFY

172Q

FY17

3QFY

174Q

FY17

1QFY

18

Tot. Inc. PAT

34 34 28 31 30 36 34 47 59 71

97 132 134 134

143 166

193 186

283 320

8 9 10 10 10 11 12 13 14 30

101 96 99 100 97 102 102 120 125 157

210 217 240

211 215 211 205

293

240 244

1HFY

139M

FY13

FY13

1QFY

141H

FY14

9MFY

14FY

141Q

FY15

1HFY

159M

FY15

FY15

1QFY

161H

FY16

9MFY

16FY

161Q

FY17

1HFY

179M

FY17

FY17

1QFY

18

Eq. AUM PMS AUM Offshore AUM

Proportion of equity AUM increased to 21% of overall

AUM v/s 15% in 1QFY17

Kotak Mahindra Bank

20 July 2017 4

1QFY18 conference call highlights Asset quality Guidance: FY18 credit cost should be lower than that in FY17 (61bp). 4 of the 12 accounts were not NPLs at the time of ING merger due diligence, but

were recognized as stressed accounts at that time. These accounts were already classified as GNPL before 4QFY17.

Balance sheet related Management expects ~20% loan growth in FY18. Kotak Prime – margins in car financing were under pressure earlier, but have

improved over the past six months. While the CV loan book grew 40%+ YoY, disbursements were up only 8% YoY.

The CE loan book has grown faster than the CV loan book, both QoQ and YoY (although from a smaller base).

Strong customer acquisition in low-to-mid size market corporates and deepening penetration in large corporates drove corporate growth this quarter.

Tractor sales/disbursements in the past few months have been strong, but collections are still lagging. KMB has gained market share in this segment.

At a business level, the company segregates its loan book into consumer, commercial and wholesale segments. The loan book is roughly equally split among these three segments. YoY loan growth for 1QFY18 – consumer: 20%, Commercial: 14-15%, Wholesale: 21%.

Sustainable NIM going forward according to management is 4.25%. P/L related Sustainable NIM going forward according to management is 4.25%. Other highlights According to management, mutual funds are gaining share of high quality credit

from banks. Management clarified that they continue to look for inorganic opportunities,

notably in the stressed assets space. Sustainable NIM going forward according to management is 4.25% Valuation and view Merger with eIVBL places KMB in a sweet spot with strong presence across

geographies, products and healthy capitalization (tier 1 of ~19%). The merged entity is the fourth largest private sector bank with a loan book of ~INR1.4t. Further, KMB’s conglomerate structure places it in a very sweet position to ride the up-cycle across financial services.

Emerging opportunities for mid-size private banks post demon, coupled with healthy capitalization, leave KMB in a strong position to capitalize. To leverage on its geographical expansion, management is focusing on product penetration, with higher emphasis on agriculture (will help in priority sector loans), small business loans (untapped opportunity; creating niche for itself) and mortgage loan. Post initial merger-related hiccups, most products have started witnessing healthy traction.

Maintain Buy with a TP of INR1,153 (4.2x consol.

FY19E BV)

Kotak Mahindra Bank

20 July 2017 5

Operating leverage is expected to kick in the expanded underutilized capacity. Higher refinancing opportunities, increased product offering on the combined network and product penetration to eIVBL customers will keep loan growth healthy. On a lower base, we are factoring in loan CAGR of ~24% over FY17-20E. We expect PPoP (adjusted) CAGR of ~23% over FY17-20E, largely driven by stable/marginally decline in margins and operating leverage. Large part of current year credit cost was driven by eIVBL portfolio, and credit cost has normalized and expected to remain under check. With just 21bp of SMA2 accounts, no 5:25 and SDR on balance sheet, comfort on asset quality remains the highest.

Post-merger with eIVB, share of lending business in steady state profitability is likely to increase to ~84%, providing much-needed stability to earnings. Capital light nature of capital market and asset management businesses can provide upside to RoE if there is strong improvement in business cycle. Green shoots of the same are visible post demon. We expect consolidated RoEs to improve to ~15-16% by FY18 on the back of strong improvement in banking business RoAs to ~1.8%.

Backed by higher capitalization, diversified business loan book, strong risk management and presence across financial services, KMB has historically traded at a premium multiples to peers, despite relatively low RoE. We are positive on the business with the expected operating leverage from eIVBL. At our SOTP of INR1,153, KMB will trade at 4.2x FY19E consolidated BV. Buy.

Exhibit 8: Kotak Mahindra: SOTP valuation FY19-based

Value

(INR B) Value

(USD B) INR per share

% To Total Rationale

Lending Business 1,904 28.2 1,000 87 Kotak Mahindra Bank 1,689 25.1 888 77 4x FY19E Core NW, ~1.8% RoA and ~16% Core RoE Kotak Prime (Car and other loans) 164 2.4 86 7 3x FY19E Net Worth, ~14% Core RoE Kotak Investment Company (LAS) 50 0.7 26 2 3x FY19E Net Worth; ~25% ROE Asset Management Business 99 1.5 52 5 Domestic Mutual Fund 63 0.9 33 3 5% of FY19E Avg. AUM of INR1.25T Alternative Assets 14 0.2 12 1 12% of FY19E AUM of INR116b Offshore Funds 22 0.3 7 1 7% of FY19E AUM of INR318b Capital Markets related Business 117 1.7 61 5 Kotak Securities 106 1.6 56 5 20x FY19E Earnings; Implied ~2.5x Core BV Kotak Investment Banking (KMCC) 10 0.2 5 0 3x FY19E Free Networth Kotak Life Insurance 74 1.1 39 3 Target Value 2,194 32.5 1,153 100 implied 4.2x PBV; ROE of ~15% Current market cap. 1,866 27.7 980 Upside (%) 18 18 18


Kotak Mahindra Bank

20 July 2017 6

Exhibit 9: We largely maintain our earnings estimates INR b Old Est. Revised Est. Change (%)

FY18 FY19 FY20 FY18 FY19 FY20 FY18 FY19 FY20 Net Interest Income 93.8 111.0 133.8 93.9 112.1 135.3 0.2 1.0 1.1 Other Income 41.7 50.9 62.2 42.3 51.6 63.0 1.5 1.3 1.2 Total Income 135.5 161.9 196.0 136.2 163.7 198.3 0.6 1.1 1.2 Operating Expenses 62.5 71.9 83.7 63.5 73.1 85.0 1.7 1.7 1.6 Operating Profits 73.0 90.0 112.3 72.7 90.6 113.2 -0.3 0.7 0.8 Provisions 8.0 7.8 9.6 8.2 7.8 9.6 2.6 0.0 0.0 PBT 65.0 82.3 102.7 64.5 82.9 103.6 -0.7 0.7 0.9 Tax 22.1 28.0 34.9 21.9 28.2 35.2 -0.7 0.7 0.9 Standalone PAT 42.9 54.3 67.8 42.6 54.7 68.4 -0.7 0.7 0.9 Consolidated PAT 62.0 77.7 95.9 61.7 78.1 96.6 -0.5 0.5 0.7 Loans 1,660 2,075 2,594 1,660 2,075 2,594 0.0 0.0 0.0 Deposits 1,732 2,182 2,749 1,810 2,281 2,874 4.5 4.5 4.5 Margins (%) 4.47 4.47 4.39 4.45 4.45 4.37 SA RoA (%) 1.85 1.99 2.03 1.84 1.99 2.04 Core RoE (%) 13.2 13.5 14.8 13.1 13.6 14.9


Exhibit 10: We largely maintain estimates at the consolidated level INR b Old Est. Revised Est. Change (%)

FY18 FY19 FY20 FY18 FY19 FY20 FY18 FY19 FY20 Kotak Mahindra Bank (Standalone) 42.9 54.3 67.8 42.6 54.7 68.4 -0.7 0.7 0.9Kotak Mahindra Prime 6.0 7.0 8.0 6.0 7.0 8.0 0.2 0.2 0.4 Kotak Mahindra Investments 2.6 3.6 4.6 2.6 3.6 4.6 Lending Business 51.5 64.9 80.4 51.2 65.3 81.0 -0.5 0.6 0.8International subsidiaries 1.1 1.5 1.9 1.1 1.5 1.9 Kotak Mahindra AMC & Trustee Co 1.0 1.3 1.6 1.0 1.3 1.6 Kotak Investment Advisors 0.2 0.2 0.3 0.2 0.2 0.3 Asset Management Business 2.3 3.0 3.8 2.3 3.0 3.8 2 -1 0 Kotak Securities 4.3 5.3 6.5 4.3 5.3 6.5 Kotak Mahindra Capital Company 0.6 0.7 0.8 0.6 0.7 0.8 Capital Market Business 4.9 6.0 7.3 4.9 6.0 7.3 -0.1 -0.2 0.5Consol. PAT excluding Kotak Life 58.8 73.9 91.5 58.5 74.3 92.2 -0.6 0.5 0.7Kotak OM Life Insurance 3.5 4.0 4.6 3.5 4.0 4.6 Consolidation Adjust. -0.1 -0.1 -0.1 -0.1 -0.1 -0.1Consol. PAT Including Kotak Life 62.1 77.8 96.0 61.8 78.2 96.7 -0.4 0.5 0.7


Kotak Mahindra Bank

20 July 2017 7

Exhibit 11: KMB group Earnings Estimates FY11 FY12 FY13 FY14 FY15E FY16 FY17 FY18E FY19E Kotak Mahindra Bank (Standalone) 11,367 15,414 19,737 21,603 24,776 20,898 34,115 42,587 54,693 Kotak Mahindra Prime 3,179 3,849 4,307 4,907 5,077 5,025 5,150 6,014 7,013 Kotak Mahindra Investments 240 153 336 420 1,060 1,540 1,960 2,629 3,604 Lending Business 14,786 19,415 24,380 26,930 30,913 27,463 41,225 51,230 65,309 International subsidiaries 509 -110 60 70 520 1,050 860 1,118 1,453 Kotak Mahindra AMC & Trustee Co 173 154 35 410 -290 720 560 1,042 1,303 Kotak Investment Advisors 327 361 307 180 250 50 125 175 225 Asset Management Business 1,009 405 401 660 480 1,820 1,545 2,335 2,981 Kotak Securities 1,819 1,258 1,145 1,600 2,900 2,510 3,610 4,333 5,313 Kotak Mahindra Capital Company 519 59 167 140 130 320 460 563 677 Capital Market Business 2,338 1,318 1,312 1,740 3,030 2,830 4,070 4,896 5,990 Consol. PAT excluding Kotak Life 18,133 21,137 26,093 29,330 34,423 32,113 46,840 58,461 74,280 YoY Growth (%) 22 17 23 12 17 -7 46 25 27 Kotak OM Life Insurance 1,014 2,030 1,900 2,390 2,290 2,510 3,030 3,485 4,007 Consolidation Adjust. -294 -282 21 -492 -142 -34 -466 -200 -200 Consol. PAT Including Kotak Life 18,853 22,885 28,014 31,228 36,571 34,589 49,404 61,746 78,087 YoY Growth (%) 23 21 22 11 17 -5 43 25 26


Exhibit 12: KMB group earnings snapshot (% of total) FY11 FY12 FY13 FY14 FY15E FY16 FY17 FY18E FY19E Kotak Mahindra Bank (Standalone) 60 67 70 69 68 60 69 69 70

Kotak Mahindra Prime 17 17 15 16 14 15 10 10 9 Kotak Mahindra Investments 1 1 1 1 3 4 4 4 5 Lending Business 78 85 87 86 85 79 83 83 84 International subsidiaries 3 0 0 0 1 3 2 2 2 Kotak Mahindra AMC & Trustee Co 1 1 0 1 -1 2 1 2 2 Kotak Investment Advisors 2 2 1 1 1 0 0 0 0 Asset Management Business 5 2 1 2 1 5 3 4 4 Kotak Securities 10 5 4 5 8 7 7 7 7 Kotak Mahindra Capital Company 3 0 1 0 0 1 1 1 1 Capital Market Business 12 6 5 6 8 8 8 8 8 Consol. PAT excluding Kotak Life 96 92 93 94 94 93 95 95 95 Kotak OM Life Insurance 5 9 7 8 6 7 6 6 5 Consol. PAT Including Kotak Life 100 100 100 100 100 100 100 100 100


Kotak Mahindra Bank

20 July 2017 8

Exhibit 13: Valuation metrics

66 Rating CMP Mcap EPS (INR) P/E (x) BV (INR) P/BV (x) RoA (%) RoE (%)

FY19E (INR) (USDb) FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY19E ICICIBC* Buy 301 30.0 15.6 17.9 13.6 11.0 146.6 159.2 1.45 1.24 1.23 1.23 9.4 10.1 HDFCB Buy 1,708 67.3 67.1 79.4 25.4 21.5 387 448 4.41 3.81 1.81 1.78 18.2 19.0 AXSB Neutral 540 19.3 23.8 40.3 22.7 13.4 245 278 2.21 1.95 0.87 1.23 10.1 15.4 KMB* Buy 980 28.3 32.2 40.4 30.4 24.3 232 271 4.23 3.62 1.84 1.98 14.9 16.1 YES Buy 1,571 11.1 90.7 114.6 17.3 13.7 541 632 2.90 2.49 1.75 1.80 18.0 19.5 IIB Buy 1,562 14.6 61.9 76.8 25.2 20.3 383 446 4.08 3.50 1.90 1.95 17.3 18.5 IDFC Bk Neutral 61 3.3 3.5 4.2 17.5 14.7 46 49 1.34 1.25 0.93 0.91 7.9 8.8 FB Buy 119 3.1 5.5 6.8 21.8 17.5 62 68 1.91 1.76 0.83 0.85 10.2 10.5 DCBB Neutral 193 0.9 8.4 10.4 23.1 18.6 83 93 2.32 2.08 0.95 0.96 11.4 11.8 JKBK Neutral 84 0.7 4.4 8.0 19.2 10.5 112 118 0.75 0.71 0.26 0.43 4.0 7.0 SIB Buy 28 0.6 2.9 3.7 9.9 7.7 28 30 1.02 0.93 0.65 0.74 10.8 12.7 Equitas Buy 169 0.9 4.8 7.4 34.9 22.7 70 77 2.40 2.19 1.66 2.16 7.1 10.1 RBL Under Review 539 3.1 18.0 24.2 29.9 22.3 128 148 4.20 3.64 1.23 1.28 14.9 17.5 Private Aggregate SBIN (cons)* Buy 291 39.3 17.9 23.3 14.5 11.0 230 249 1.12 1.03 0.44 0.50 8.7 10.0 PNB Buy 157 5.2 10.3 14.5 15.3 10.8 187 199 0.84 0.79 0.29 0.37 5.6 7.5 BOI Neutral 151 2.6 13.7 22.0 11.0 6.9 233 255 0.65 0.59 0.22 0.33 6.1 9.0 BOB Buy 162 5.9 18.4 22.5 8.8 7.2 162 179 1.00 0.90 0.59 0.66 11.9 13.2 CBK Neutral 352 3.1 30.1 47.0 11.7 7.5 498 540 0.71 0.65 0.29 0.41 6.2 9.1 UNBK Neutral 154 1.7 24.6 34.5 6.2 4.4 315 345 0.49 0.44 0.37 0.47 8.1 10.5 OBC Neutral 149 0.8 17.1 21.4 8.7 7.0 382 404 0.39 0.37 0.22 0.26 4.6 5.4 INBK Buy 330 2.5 33.2 38.0 9.9 8.7 327 356 1.01 0.93 0.70 0.72 10.6 11.1 Public Aggregate Banks Aggregate HDFC* Under Review 1,651 40.4 39.2 44.2 25.0 20.0 228 285 4.30 3.10 1.79 1.82 18.3 17.4 LICHF Neutral 751 5.9 47.9 53.8 15.7 14.0 252 295 2.98 2.55 1.64 1.63 20.6 19.7 IHFL Buy 1,159 7.5 88.9 113.9 13.0 10.2 325 372 3.57 3.12 3.40 3.46 29.0 32.7 GRHF Neutral 483 2.8 9.9 12.1 48.6 40.0 33 40 14.57 11.95 2.43 2.43 33.0 32.8 REPCO Buy 812 0.8 35.8 42.5 22.7 19.1 214 253 3.79 3.21 2.25 2.21 18.1 18.2 DEWH Buy 477 2.3 37.0 45.4 12.9 10.5 279 315 1.71 1.52 1.25 1.33 13.9 15.3 Housing Finance RECL Neutral 184 5.6 35.0 40.4 5.2 4.5 196 227 0.93 0.81 3.10 3.12 19.1 19.1 POWF Neutral 127 5.1 27.2 30.2 4.7 4.2 169 191 0.75 0.66 2.76 2.72 17.0 16.8 Infra Finance SHTF Buy 961 3.4 78.5 98.5 12.2 9.8 564 646 1.70 1.49 2.60 2.91 14.7 16.3 MMFS Buy 358 3.1 13.6 16.4 26.4 21.9 123 132 2.92 2.71 1.68 1.74 11.4 12.8 BAF Buy 1,588 13.1 47.6 62.9 33.3 25.3 216 270 7.35 5.88 3.51 3.51 24.3 25.9 CIFC Buy 1,141 2.8 55.0 66.4 20.7 17.2 322 380 3.55 3.01 2.74 2.78 18.5 18.9 SCUF Buy 2,318 2.4 132.8 171.2 17.5 13.5 874 1,019 2.65 2.27 3.63 3.96 16.2 18.1 MUTH Buy 460 2.9 41.0 43.3 11.2 10.6 189 217 2.43 2.12 4.99 4.61 23.2 21.4 SKSM Neutral 777 1.7 41.3 53.0 18.8 14.7 219 272 3.55 2.86 4.49 4.26 20.9 21.6 Asset Finance NBFC Aggregate Financials


Kotak Mahindra Bank

20 July 2017 9

Financials and valuations (KMB+EIVBL - Proforma-merged)

Income Statement (INR Million) Y/E March 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E Interest Income 68,838 1,00,370 1,29,041 1,39,722 1,55,677 1,63,842 1,76,989 1,93,973 2,30,743 2,82,568 Interest Expense 37,798 63,162 81,598 84,991 93,876 94,838 95,728 1,00,057 1,18,662 1,47,264 Net Interest Income 31,040 37,208 47,443 54,731 61,800 69,004 81,261 93,916 1,12,080 1,35,304 Change (%) 15.5 19.9 27.5 15.4 12.9 11.7 17.8 15.6 19.3 20.7 Non Interest Income 14,355 16,471 18,875 22,668 29,119 26,122 34,772 42,329 51,610 62,950 Net Income 45,395 53,679 66,318 77,399 90,919 95,126 1,16,033 1,36,244 1,63,691 1,98,254 Change (%) 15.3 18.2 23.5 16.7 17.5 4.6 22.0 17.4 20.1 21.1 Operating Expenses 25,793 29,450 34,825 40,353 48,711 54,715 56,185 63,530 73,059 85,050 Pre Provision Profits 19,602 24,229 31,493 37,046 42,208 40,411 59,848 72,715 90,631 1,13,204 Change (%) 1.1 23.6 30.0 17.6 13.9 -4.3 48.1 21.5 24.6 24.9 Provisions (excl tax) 2,887 1,688 2,758 4,545 4,723 9,174 8,367 8,190 7,763 9,579 PBT 16,715 22,541 28,735 32,501 37,486 31,237 51,481 64,525 82,868 1,03,625 Tax 5,347 7,127 8,998 10,898 12,710 10,339 17,366 21,939 28,175 35,233 Tax Rate (%) 32.0 31.6 31.3 33.5 33.9 33.1 33.7 34.0 34.0 34.0 PAT 11,367 15,414 19,737 21,603 24,776 20,898 34,115 42,587 54,693 68,393 Change (%) 41.5 35.6 28.0 9.5 14.7 -15.7 63.2 24.8 28.4 25.0 Consolidated PAT (incl VYSB) 18,853 22,885 28,014 31,228 36,571 34,589 49,404 61,746 78,087 96,575 Change (%) 23.3 21.4 22.4 11.5 17.1 -5.4 42.8 25.0 26.5 23.7

Balance Sheet (INR Million) Y/E March 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E Net Worth 98,261 1,23,309 1,44,646 1,97,401 2,20,521 2,39,625 2,76,179 3,74,813 4,26,958 4,92,163 Deposits 5,94,552 7,37,319 9,23,628 10,02,891 12,40,148 13,86,430 15,74,258 18,10,396 22,81,099 28,74,185 Change (%) 19.5 24.0 25.3 8.6 23.7 11.8 13.5 15.0 26.0 26.0 of which CASA Dep 1,92,491 2,44,498 2,83,534 3,25,865 4,12,995 5,27,764 6,92,646 8,51,927 10,48,253 12,90,328 Change (%) 21.1 27.0 16.0 14.9 26.7 27.8 31.2 23.0 23.0 23.1 Borrowings 1,58,709 2,22,920 2,69,219 2,25,641 2,05,411 2,09,753 2,34,269 1,87,415 2,06,157 2,16,465 Other Liabilities & Prov. 47,124 43,125 47,809 54,053 67,119 86,790 85,836 94,420 1,03,862 1,14,248 Total Liabilities 8,98,646 11,26,673 13,85,301 14,79,986 17,33,198 19,22,598 21,70,542 24,67,045 30,18,075 36,97,061 Current Assets 49,924 58,651 65,226 1,18,060 97,457 1,08,797 2,25,720 1,43,257 1,81,469 2,22,558 Investments 2,81,797 3,42,823 4,71,517 4,22,053 5,13,313 5,12,602 4,50,742 5,45,398 6,32,661 7,40,214 Change (%) 22.6 21.7 37.5 -10.5 21.6 -0.1 -12.1 21.0 16.0 17.0 Loans 5,29,314 6,78,159 8,02,410 8,88,565 10,69,718 11,86,653 13,60,821 16,60,202 20,75,252 25,94,066 Change (%) 34.7 28.1 18.3 10.7 20.4 10.9 14.7 22.0 25.0 25.0 Fixed Assets 9,284 9,508 9,640 16,315 16,204 15,516 15,376 15,625 15,873 16,121 Other Assets 28,326 37,532 36,508 34,994 36,507 99,030 93,240 1,02,564 1,12,820 1,24,102 Total Assets 8,98,646 11,26,673 13,85,301 14,79,986 17,33,198 19,22,598 21,45,900 24,67,045 30,18,075 36,97,061

Asset Quality (%) GNPA (INR m) 11,567 11,771 13,283 17,037 22,884 28,381 35,786 43,245 49,190 58,567 NNPA (INR m) 3,029 2,899 3,205 6,756 10,722 12,620 17,181 19,460 22,135 26,355 GNPA Ratio 2.15 1.71 1.63 1.90 2.12 2.36 2.59 2.57 2.34 2.23 NNPA Ratio 0.57 0.43 0.40 0.76 1.00 1.06 1.26 1.17 1.07 1.02 Slippage Ratio 1.15 0.90 0.97 1.58 2.51 2.68 1.51 1.60 1.40 1.40 Credit Cost 0.56 0.21 0.33 0.27 0.62 0.63 0.48 0.40 0.30 0.30 PCR (Excl Tech. write off) 73.8 75.4 75.9 60.3 53.1 55.5 52.0 55.0 55.0 55.0 E: MOSL Estimates

Kotak Mahindra Bank

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Financials and valuations (KMB+EIVBL - Proforma-merged)

Ratios Y/E March 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E Spreads Analysis (%)

Avg. Yield-Earning Assets 9.5 10.8 11.0 10.5 10.5 9.8 9.6 9.2 9.2 9.1 Avg. Yield on loans 11.4 12.8 13.1 12.4 12.0 11.1 10.5 9.8 9.5 9.5 Avg. Yield on Investments 6.3 7.3 7.8 7.7 7.7 6.7 7.6 7.5 7.3 7.0 Avg. Cost-Int. Bear. Liab. 5.6 7.4 7.6 7.0 7.0 6.2 5.6 5.3 5.3 5.3 Avg. Cost of Deposits 5.2 7.0 7.1 6.8 6.8 6.0 5.6 5.1 5.0 5.0 Interest Spread 3.9 3.4 3.5 3.5 3.4 3.5 3.9 3.9 3.9 3.8 Net Interest Margin 4.3 4.0 4.1 4.1 4.2 4.1 4.4 4.4 4.5 4.4

Profitability Ratios (%) RoE 13.5 14.0 14.8 12.7 11.9 9.1 13.2 13.1 13.6 14.9 RoA 1.4 1.5 1.6 1.5 1.5 1.1 1.7 1.8 2.0 2.0 Consolidated ROE 15.5 14.8 15.0 13.4 13.0 10.9 13.8 15.0 16.3 17.1 Other Ratios (%)

Int. Expense/Int.Income 54.9 62.9 63.2 60.8 60.3 57.9 54.1 51.6 51.4 52.1 Non Int. Inc./Net Income 31.6 30.7 28.5 29.3 32.0 27.5 30.0 31.1 31.5 31.8 Cost/Income 56.8 54.9 52.5 52.1 53.6 57.5 48.4 46.6 44.6 42.9 Empl. Cost/Op. Exps. 53.9 51.7 52.4 51.4 48.9 51.5 49.3 47.1 47.1 47.7 Loans/Deposit Ratio 89.0 92.0 86.9 88.6 86.3 85.6 86.4 91.7 91.0 90.3 CASA Ratio 32.4 33.2 30.7 32.5 33.3 38.1 44.0 47.1 46.0 44.9 Investment/Deposit Ratio 47.4 46.5 51.1 42.1 41.4 37.0 28.6 30.1 27.7 25.8

Valuation Standalone Book Value (INR) 48.6 56.1 65.8 82.2 120.4 130.6 150.0 197.0 224.4 258.6 Change (%) 8.5 14.8 31.3 13.9 15.3 Consolidated BV (INR) 76.9 89.6 104.6 126.3 164.5 181.9 207.7 232.4 272.1 321.2 Change (%)

10.5 14.2 11.9 17.1 18.1

Price-BV (x) 6.0 5.4 4.7 4.2 3.6 3.1 Consolidated EPS (INR) 10.6 12.4 14.7 16.0 20.1 18.9 26.8 32.4 41.0 50.8 Change (%)

-6.0 42.3 20.9 26.5 23.7

Price-Earnings (x) 48.9 52.0 36.5 30.2 23.9 19.3 Dividend Per Share (INR) 0.1 0.2 0.2 0.2 0.4 0.5 0.0 0.9 1.1 1.4 Dividend Yield (%) 0.0 0.0 0.0 0.1 0.1 0.1 E: MOSL Estimates

Kotak Mahindra Bank

20 July 2017 11

Corporate profile Exhibit 1: Exhibit 1: Sensex rebased

Source: MOSL/Bloomberg

Exhibit 2: Shareholding pattern (%)

Jun-17 Mar-17 Jun-16

Promoter 30.1 32.1 33.7

DII 8.2 7.8 5.2

FII 40.2 38.6 35.5

Others 21.5 21.5 25.6

Note: FII Includes depository receipts Source: Capitaline

Exhibit 3: Top holders Holder Name % Holding CANADA PENSION PLAN INVESTMENT BOARD - MANAGED BY IM2 6.1

EUROPACIFIC GROWTH FUND 4.9

ING MAURITUS INVESTMENTS I 3.7 FIRST STATE INVESTMENTS ICVC-STEWART INVESTORS ASIA PACIFIC LEADERS FUND 1.8

SUMITOMO MITSUI BANKING CORPORATION 1.7

Source: Capitaline Exhibit 2: Top management

Name Designation

Shankar Acharya Chairman

Dipak Gupta Joint Managing Director

Uday Kotak Executive Vice Chairman & MD

Bina Chandarana Company Secretary

Source: Capitaline

Exhibit 3: Directors Name Name

Amit Desai N P Sarda

Prakash Apte C Jayaram

Farida Khambata Mark Edwin Newman

S Mahendra Dev Uday Chander Khanna

*Independent

Exhibit 6: Auditors Name Type

S R Batliboi & Co LLP Statutory

Source: Capitaline

Exhibit 7: MOSL forecast v/s consensus EPS (INR)

MOSL forecast

Consensus forecast Variation (%)

FY18 32.4 32.5 -0.4

FY19 41.0 40.0 2.5

FY20 50.8 49.5 2.6

Source: Bloomberg

Company description Kotak Mahindra Bank (KMB) is part of the larger Kotak Mahindra Group led by Mr. Uday Kotak, Founder and Managing Director of the Bank. The group has a strong presence across financial services value chain. Notably, KMB is the only bank in India’s corporate history to be converted into a bank from a non-banking finance company. The bank has pan-India presence with 1,333 branches and 2,032 ATMs as on March 31, 2016. In 2015, KMB merged with EIVBL in an all-stock deal.

Kotak Mahindra Bank

20 July 2017 12

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Disclosure of Interest Statement KOTAK MAHINDRA BANK Analyst ownership of the stock No Served as an officer, director or employee - No

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