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Kotak Mahindra Bank (KMB)

30 Mar 2016

Darpin Shah

[email protected]

+91-22-6171-7328

Siji Philip

[email protected]

+91-22-6171-7324

Parul Gulati

[email protected]

+91-22-6639-3035

All virtue, no vice!

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KOTAK MAHINDRA BANK : INITIATING COVERAGE

Kotak Mahindra Bank (KMB) Structure


Rs 595 / share (80% of SOTP)

KotakMahindra

Prime (KMP)

Auto Finance

Rs 77/share

(10% of SOTP)

KotakMahindra

Investments(KMI)

Loan AgainstShares

Rs 12/share

(1.6% of SOTP)

Kotak

Securities

(K-sec)Broking

Rs 21/share

(2.9% ofSOTP)

KotakMahindra

AssetManagement

(K-AMC)

AssetManagement

Rs 15/share(2.1% ofSOTP)

Kotak

MahindraCapitalCompany(KMCC)

Investment

Banking

Re 1/share(0.2% ofSOTP)

Kotak

InvestmentAdvisors

Offshore & Alternate

Investments


KM OldMutual LifeInsurance

Life Insurance


Sub’s value post 20% holding co. discount

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3


All virtue, no vice!

Kotak Mahindra Bank encapsulates most of the virtues

that should characterise a high quality Indian bank. Itscore lending business has sustainably high spreads,

durable fee streams and tightly controlled asset quality

on a strategically constructed loan mix.

A market leading (and synergistic) securities and

investment banking practice align it well with cyclical

tailwinds. Asset management and insurance businesses

look surprisingly small (given the evolution in other

verticals) but are now well positioned to outpace

system growth. The bank is well capitalised at 16%

(with Tier I at 15%).

Valuations are expectedly high at 3.6x standalone

FY18E ABV, adjusted for subs at 20% holdco discount.

Our SoTP of Rs 747 assigns 4.0x to standalone FY18E

ABV and lower multiples of 3.5/2.5x to the auto-

finance/LAS verticals. We initiate coverage with a BUY.

To us, KMB represents a high-quality and broad-based

play on Indian financial services, not just banks.

• A consciously low exposure to stressed sectors (8.5%, lowest

among peers), granular book and focus on working capital

advances (rather than term loans or project finance) have

helped keep a tight leash on asset quality.

• After the acquisition of e-VYSB, KMB created a ‘bad bank’, with

total funded and non-funded exposures of ~6%, i.e. Rs 25bn,

(2.5% for the merged entity). The cross-sell, product

diversification and cost benefits of the merger with e-VYSB are

now set to accrue. We expect significant improvement in cost

efficiency and branch productivity (parameters where Kotak

currently lags peers, esp post-merger). This improvement is

premised on a widening of the retail product mix, increase in

fee incomes, trimming of redundant costs and manpower and

operating leverage.

•On the liability side, retail franchise, SA accretion and urbanvisibility are running high with Kotak offering differential

savings rates (like IIB and YES).

Private Banks : PABV vs. RoAA

AXSB

CUBDCB

FB

ICICIB

IIB

KMB

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0

ROA (FY18E)

P/ABV (FY18E)

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SOTP

Rs bn Per Share Rationale

Kotak Mahindra Bank - Standalone 1,090.9 595.3 4x FY18E core ABV of Rs 149

Kotak Mahindra Prime - Car Finance 176.9 96.5 3.5x FY18E core NW

Kotak Mahindra Investments - LAS 28.1 15.4 2.5x FY18E core NW

Kotak Securities - Broking 49.2 26.8 15x FY18E Earnings

Kotak Mahindra AMC - Asset Management 35.3 19.3 5% of FY18E AUM

Kotak Life - Life Insurance 36.8 20.1 23% APE CAGR FY16-18E; NBAP Margin at 16%.

KMCC - Investment Banking 2.6 1.4 1x FY18E core NW

Kotak Alternative Assets 4.9 2.7 7.5% of FY18E AUM

Offshore Funds 14.6 8.0 5% of FY18E AUM

Total Value of Subsidiaries 348.3 190.1

Less : 20% Holding Discount 69.7 38.0

Total SOTP Value 1,369.6 747.4

Current Value 1254.5 684.6

Upside (%) 9.2 9.2

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5


Contents

Lending Business : Kotak Mahindra Bank (KMB) : At A Glance …………….…………………………………………….………….…6

Advances: Granular, diversified and well-picked …….….…………………………………..………………………………………………..……………………………..7 Liability franchise: CASA strength to increase ……………..……………………………………..………………………………………..…………………………………..9

Margins to remain healthy ……………………………………………..…………………………………….………………………………………………………………………..12

Cost efficiencies: Room for improvement …………………………..………………………………….……………………………………………………………………….13

Branch productivity …………………………………………..…………………………………………………….……………………………………………………………………..14

Non Interest Income ………………………………………………………………………………………………….………………………………………………………………..…15

Asset Quality : ultra conservative approach ……………………………………….…………………………………………………………………………………………..16

Merger with VYSB …………………………………………………………………………………….……………….…………………………..……………………………………….18

Five Quarters At A Glance ………………………………………………………………………………………….………………………..………………………………………….21

Snapshot ……………………………………………………………………………………………………….……….………………………………..…………………………………….22

Standalone Financials …………………………………………………………………………………….…………….…………………………..…………………………………...23

Peer valuation …………………………………………………………………………………………….………………………………………………………………………………....25

Lending Business : Kotak Mahindra Prime: At A Glance …………………………………..…………………………………………… ..26

Car finance ……………………………………………………………………………………………………….……….…………………………………………………………………...27

Industry leading auto financier ………………………………………………………………………….………….……………………………………………………………....28

Financials …………………………………………………………………………………………………………….…………….………………………………………………………..…29

Lending Business: Kotak Mahindra Investments : At A Glance ……………………………….………………………………..…….30

LAS business ……………………………………………………………………………………………………….……………….…………………………………………………..……31

Financials …………………………………………………………………………………………………………….………………….…………………………………………………..…32

Capital Market Business: Kotal Securities : At A Glance ………………………………………….……………….……………….…….33

K sec …………………………………………………………………………………………………………………….…………………….………………………………………………….34 Financials ……………………………………………………………………………………………………………….……………………….…………………………………………..…35

Capital Market Business: Kotak Asset Management Company : At A Glance …………….…………………………….…….36

KAMC …………………………………………………………………………………………………………………….……………………………..……………………………………..…37

Financials ……………………………………………………………………………………………………………….………………………………………………………………………38

Capital Market Business - Kotak Mahindra Capital Co: At A Glance …………………………….…………………….…………..39

KMCC …………………………………………………………………………………………………………………………….….…………………………………………………………...40

Insurance Business - Kotak Life Insurance Co : At A Glance ………………………………………………….…………….…………. 41

K-Life ………………………………………………………………………………..………………………………………………….……………………………………………..………….42

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6


Lending Business : Kotak Mahindra Bank


Total Assets

Rs 1,821bn

Total Loans

Rs 1,153bn

Total Deposits

Rs 1,309bn

Total CASA

Rs 462bn

Net Impaired Assets (%)

1.26%

RoAA(%)

1.4%

CRAR /Tier I(%)

16.2/15%

Data as of Dec-15

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Advances: Granular, diversified and well-picked

Kotak Mahindra Bank (KMB) has a well-diversified loan book

(Rs 1.15trn) with a tilt towards granular segments like retail,

agri and SME (~69% of loans as of Dec-15). The bank has a

presence in several high-yielding segments like self-employed

non-professional (SENP), tractors, cars, etc.

Mortgages form ~19% of the retail loans, while PL and CV/CE

are ~8% and 6%, respectively.

Acquiring e-VYSB in 2QFY15 contributed significantly to KMB’s

SME/business banking portfolio, which now stands at ~20% of

loans (vs.

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Advances: Growth unchallenged

Consol Loan Book

Consol Composition

Source: Bank, HDFC sec Inst Research; Data from 1QFY16 onwards includes the e-VYSB merger effect.

Standalone Composition

Standalone Loan Book

0%

20%

40%

60%

80%

100%

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6

CV and CE Agri Finance Mortgage Loans

PL Business Banking Corp Banking

0%

20%

40%

60%

80%

100%

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6

CV and CE Agri Finance Auto loans

Mortgage loans PL Business Banking

Corp Banking Others

4 2 3

4 5 4

5 0 2

4 8 5

5 0 5

5 0 6

5 3 1

5 3 0

5 6 9

6 0 9

6 4 6

6 6 2 1

, 0 3 6

1 , 1 1 7

1 , 1 5 3

2 9 3

3 0 0

3 1 6

3 1 8

3 3 0

3 2 9

3 4 0

3 5 8

3 8 2

3 9 6

4 0 6

4 0 6

- -

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

-

200

400

600

800

1,000

1,200

1,400

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6

KMB VYSB YoY (%) - RHSRs bn

5 7 0

6 1 3

6 7 0

6 6 3

6 8 4

6 8 2

7 1 0

7 1 7

7 7 1

8 1 4

8 6 1

8 8 6 1

2 5 5

1 3 4 7

1 4 1 1

2 9 3

3 0 0

3 1 6

3 1 8

3 3 0

3 2 9

3 4 0

3 5 8

3 8 2

3 9 6

4 0 6

4 0 6

-

5.0

10.0

15.0

20.0

25.0

30.0

0

200

400

600

800

1000

1200

1400

1600

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6


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Consolidated aggregate (funded + non funded) exposure

Source: Bank, HDFC sec Inst Research

(%) 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16

Auto Loans 23.9 23.1 22.0 21.9 15.0 14.4 16.1

Personal Loans 4.0 4.2 4.4 4.4 3.6 3.6 3.7

HL/LAP 13.9 13.7 13.7 14.0 13.2 12.8 12.4

Credit cards 0.6 0.5 0.6 0.6 0.4 0.4 0.5

Other retail 7.6 5.8 7.5 9.4 17.2 11.7 1.7

Total Retail 50.0 47.3 48.1 50.3 49.4 42.9 34.4

Commercial Real Estate - - - - - 4.3 4.7

Engineering 3.6 3.8 3.8 2.9 3.7 3.9 4.0

Automobiles 4.5 5.0 4.5 5.0 4.1 3.5 4.0

NBFCs 4.0 3.6 3.9 3.2 3.4 3.5 3.7

Telecom - 1.5 1.4 3.3 3.0 2.6 2.6

Iron and steel 1.5 1.6 2.2 2.5 3.0 2.4 2.2

Drugs and Pharmaceuticals - 2.0 1.8 2.3 1.7 1.5 2.2

Chemical, dyes, paints etc 5.2 2.5 2.4 3.0 2.2 2.2 1.9

Other Infrastructure 9.4 2.8 4.0 7.5 2.5 2.2 1.5

Power - 2.8 2.4 2.0 1.7 1.5 1.5

Construction 5.9 9.5 8.8 7.9 6.1 1.6 1.4

Fertilisers - 0.9 0.7 0.8 0.8 0.8 1.0

Roads and Ports - 0.4 0.4 0.3 0.4 0.6 0.6

Other industries 16.0 16.5 15.6 9.1 18.2 26.6 34.1

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

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10


Liability franchise: CASA strength to increase

After the liberalisation of savings interest rates, KMB was one of

the few private banks to offer differential interest rates. It offers6% on deposits above Rs 1 lakh and 5% below

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Liability franchise

CASA : Quarterly trend

SA Growth Vs. Peers


Deposits Break-up

CASA (%) Vs. Peers


1 6

1 6

1 6 1

9

1 3

1 4

1 3

1 5

1 3

1 3

1 3

1 5

1 3

1 4

1 5 1

8 1 5

1 6

1 5

1 1

1 0 1

2 1 3

1 3 1

3 1 3

1 4

1 5

1 6

1 7 1

7 1 8

1 7

1 7 1

9 1 9 2

0 2 0

6 6

6 8

6 6 6

1

7 3 6

6 6 7

7 1

7 1

7 1

7 0

6 8

6 9

6 9

6 8 6

4 6 6

6 4

6 5

1 Q F Y 1 2

2 Q F Y 1 2

3 Q F Y 1 2

4 Q F Y 1 2

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6

CA SA TD%

1 1 1

1 2 3

1 3 4

1 4 9

1 5 1

1 5 4

1 6 3

1 8 8

1 9 0

2 1 2

2 3 1

2 7 2

4 0 1

4 4 7

4 6 2

1 1 9

1 1 9

1 1 9 1

3 4

1 2 3

1 3 0

1 3 5 1

3 8

1 2 6 1

4 8

1 4 6 1

4 6

-

10.0

20.0

30.0

40.0

50.0

-

100

200

300

400

500

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6


10.0

20.0

30.0

40.0

50.0

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6

KMB HDFCB IIB AXSB ICICIBC YES

YES

AXSB

ICICIBC

HDFCB

KMB

IIB

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6


YES

KMB

IIB

ICICIBC

AXSB

HDFCB

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Margins to remain healthy

KMB enjoys one of the highest NIMs (4.3%) in the industry,

driven by a steady rise in CASA proportion, diversified and

superior asset mix, and ~36% of the book being fixed in nature.

High capital adequacy also helps. The bank’s focus is on self-

employed non-professional (SENP) customers to generate

higher yields vs. peers.

Despite similar CASA proportion, e-VYSB’s NIM was in the 3.5-

3.7% range. Hence, post the merger, KMB’s NIM dropped ~60-

70bps to ~4.2% — still the best in the industry.

With the continued SA momentum, focus on high-yielding SENP

customers, increasing proportion of CV/CE business (

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Cost efficiencies: Room for improvement

KMB’s cost efficiency ratios are below par because of (1) Lower

productivity per branch, (2) Lower non-interest incomecontribution (% of total income and average assets), and (3)

Relatively higher cost structure despite superior NIM.

KMB’s productivity (per branch) is lower than its private peers.

The loan/branch is ~21% lower than AXSB/YES and ~13% vs.

HDFCB (retail-oriented bank). Its SA/branch, too, is at the lower

end of the spectrum (Rs 200mn) vs. peers (Rs 240-330mn).

Non-interest income contribution at ~29% of total income and

~1.6% of avg. assets is lower than private players (~1.7-2.7%). KMB’s cost structures are relatively higher. The in-house legal

team and the VYSB acquisition have pushed the bank’s staff

cost/branch to Rs 4.8mn vs. private peers, who spend about Rs

2.7-3.3mn/branch. Thus, the bank’s cost efficiency ratios are

below par, with C-I ratio and C-AA at ~52% and 2.9%,

respectively, vs. 32-47% and 1.8-2.5% (except IIB at 3%) for

peers.

We believe improving productivity (more product offeringsacross geographies), higher cross sell and contained opex (led

by merger synergies) will drive operational/cost efficiency. The

management is confident of achieving C-I ratio of

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Branch productivity : room for improvement

Deposits / branch :

CASA / branch :

Source: Banks, HDFC sec Inst Research

Loans / branch :

C-AA assets (%)


1.3

1.8

2.3

2.8

3.3

3.8

4.3

4.8

5.3

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6


ICICIBC

KMB

IIBHDFCB

AXSB

YES 600

800

1,000

1,200

1,400

1,600

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6

KMB HDFCB IIB AXSB ICICIBC YESRs mn

YES

ICICIBC

KMB

IIB

AXSB

HDFCB

600

800

1,000

1,200

1,400

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6


YESKMB

HDFCB

IIB

ICICIBC

AXSB

100

200

300

400

500

600

700

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6


YES

AXSB

HDFCB

ICICIBC

IIB

KMB

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Non Interest Income

Fee Income : Growth and % of Loans

Non Interest Income % of Avg. Assets


Non Interest Income % of Total Income

Non Interest Income : Quarterly Trend


(20.0)

-

20.0

40.0

60.0

80.0

100.0

120.0

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6

Non int. income (Rs bn) YoY (RHS %)

-

0.5

1.0

1.5

2.0

2.5

0

1

2

3

4

5

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6

Fee income (Rs bn) % of loans (RHS)

15.0

20.0

25.0

30.0

35.040.0

45.0

50.0

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6

KMB HDFCB IIB AXSB ICICIBC YES%

KMB

HDFCB

ICICIBC

YES

IIB

AXSB

1.3

1.5

1.7

1.9

2.1

2.3

2.5

2.7

2.9

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6


IIB

ICICIBC

YES

KMB

HDFCB

AXIS

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Asset Quality : ultra conservative approach

Only a handful of banks (mostly private banks with retail

lending tilt) have been able to weather India’s macro

slowdown, sharp decline in commodity prices and the RBI AQR

to come out reasonably unscathed on asset quality.

KMB’s asset quality remains relatively healthy, led by a

diversified loan book which focuses on granular

retail/SME/agri loans. The lower exposures to stressed

segments and predominance of short-term working capital

loans in the lending mix has also helped.

KMB’s marginally higher net impaired assets at 1.3% (NNPA 1%

+ restructured book 0.3%) can be attributed to the VYSB

acquisition and the buyout of stressed loans.

Unlike its peers, KMB has not utilised the additional

regulatory forbearance like ARC sale, flexible 5:25

restructuring and SDR.

After e-VYSB’s acquisition, KMB created a ‘bad bank’, with

total funded and non-funded exposures of ~6%, i.e. Rs 25bn,

(2.5% for the merged entity). The bad bank includes NPAs,restructured assets, sale to ARC and standard stressed assets

largely from the corporate segment.

Asset quality at KMB’s subsidiaries is at comfortable levels. As

of Dec-15, KMP’s (car finance) NNPAs were 0.4%, while the

LAS business (Kotak Mahindra Investments) had NNPAs of

0.06% only.

At a consolidated level, GNPAs stood at Rs 28.7bn, i.e. 2.01%,

and NNPAs at Rs 12bn, i.e. 0.85%.

We expect KMB’s asset quality to remain flawless over the

FY16-18E period, given the lower exposure to stressed

sectors and cautious lending in the corporate sector. We

expect GNPAs of ~2% by FY18E after factoring in avg.

slippages of 1.05% and credit cost of 0.5%. For KMP, we have

conservatively factored in GNPAs of 0.77% by FY18.

Asset Quality : gradual improvement expected


-

0.5

1.0

1.5

2.0

2.5

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

FY12 FY13 FY14 FY15 FY16E FY17E FY18E

GNPA (Rs bn; LHS) NNPA (Rs bn; LHS) GNPA (%) NNPA (%)

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Asset Quality

Consol Asset Quality : Subsidiaries performing well

Peer comparison : Impaired assets (%)


Standalone Asset Quality : recent spike led by the merger

Subsidiaries NNPA : near flawless

-

0.5

1.0

1.5

2.0

2.5

-

5.0

10.0

15.0

20.0

25.0

30.0

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6

GNPA (LHS) NNPA (LHS) GNPA (%) NNPA (%)Rs bn %

-

0.5

1.0

1.5

2.0

2.5

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6

GNPA (LHS) NNPA (LHS) GNPA (%) NNPA (%)Rs bn %

-

0.5

1.0

1.5

2.0

2.5

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6

KMP KMI%

-

1.0

2.0

3.0

4.0

5.0

6.0

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6


HDFCB

IIB

YES

ICICIBC

AXSB

KMB

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Merger with VYSB

KMB acquired VYSB via a merger in 2QFY15. The share swap ratio

was 0.725 shares of KMB for every share of VYSB, effectivelyvaluing VYSB at Rs 160bn as at Nov-14.

The merger led to :

Increase in branch network from 641 to 1,214 (fourth largest

amongst private banks in the country) with no major overlap

and deepening presence in the south, where VYSB has a strong

foothold.

Increase in loan book to Rs 1,210bn (from Rs 814bn), with

diversification across segments. The bank benefitted fromaccess to VYSB’s traditionally strong of SME lending franchise

(38% of loans vs.

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Complementarity to Drive Higher Customer Wallet Share

VYBS KMB Merged

Corporate & Business Banking √ √ √ √ √ √ √

Commercial Banking (CV,CE etc) √ √ √ √ √ √ √

Consumer Finance √ √ √ √ √ √ √

Agriculture/Tractor √ √ √ √ √ √ √ √

Deposits - CA √ √ √ √ √

Deposits - SA √ √ √ √ √

Fees (Fx, Trade) √ √ √ √ √

Private Banking / Broking / IB √ √ √ √ √ √ √

Asset Management / Insurance - √ √ √ √

VYBS KMB Merged

Large Corporates √ √ √ √ √ √

Mid Corporates √ √ √ √ √

SMEs (including Traders) √ √ √ √ √ √ √ √

High Net Individuals √ √ √ √ √ √ √

Mass Affluent √ √ √ √ √ √ √

Mass Market √ √ √

NRIs √ √ √ √ √

MNCs √ √ √ √ √

Larger Share of Customer Wallet

Expand Customer / Product horizons

Serve customers nationally and internationally

Significant Product Complementarities Fuller Customer Segment Coverage


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Merger with VYSB

Deposits break up


Retail loans break upBranch distribution region wise

Loan book break up

West 30%

North 27%

South 38%

East 5%

Mortgages

39%

PL 12%

Commercial &

Auto 40%

Other 8%

CA 15%

SA 17%

CD 8%

TD 68%

Retail 40%

Large 33%

SME 17%

Agri 12%


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KMB : Five Quarters At A Glance

Rs mn 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 YoY (%) QoQ (%)

Net Interest Income 15.5 11.2 16.0 16.8 17.7 13.9 5.2

Non Interest Income 7.0 6.7 5.9 6.2 7.2 3.2 17.3Operating income 22.5 17.9 21.9 22.9 24.9 10.6 8.5

Operating expenses 12.3 9.3 15.9 12.5 12.8 4.1 2.7

Pre provision profits 10.2 8.6 6.0 10.4 12.1 18.4 15.4

Provisions and contingencies 0.9 0.7 3.1 1.8 2.4 157.3 33.4

PBT 9.3 7.9 2.9 8.7 9.7 4.7 11.7

Provision for Tax 3.2 2.7 1.0 3.0 3.4 6.1 12.2

PAT 6.1 5.3 1.9 5.7 6.3 4.0 11.5

Balance Sheet items/ratios

Deposits (Rs bn) 1,190 749 1,168 1,232 1,309 10.0 6.3

CASA (%) 31.7 36.4 34.3 36.2 35.3 362.3 (97.0)

Advances (Rs bn) 1,052 662 1,036 1,117 1,153 9.6 3.3Retail (%) 30.1 39.6 32.6 32.2 32.7 253.1 44.4

Agri (%) 14.3 18.3 14.7 15.3 14.6 29.7 (75.0)

Business banking (%) 20.1 9.7 20.7 20.3 20.3 22.0 1.7

Corp (%) 34.6 30.7 30.1 30.4 30.6 (406.9) 18.3

Others (%) 0.9 1.8 1.8 1.8 1.9 102.1 10.6

CD ratio (%) 88.4 88.4 88.7 90.6 88.1 (29.8) (253.6)

Profitability

Calc. Yield on Advances (%) 11.7 9.2 14.4 11.4 11.1 (61.4) (23.7)

Calc. Cost of Funds (%) 7.2 5.2 8.5 6.6 6.4 (78.4) (20.0)

NIM (%) 3.9 3.4 5.0 4.2 4.2 31.2 2.6

Cost-Income Ratio (%) 54.8 51.9 72.7 54.5 51.6 (321.9) (290.0)Tax Rate (%) 34.1 33.6 34.9 34.4 34.6 44.3 14.6

Asset Quality

Gross NPA (Rs bn) 19.8 12.4 24.2 26.6 26.9 35.6 1.3

Net NPA (Rs bn) 9.0 6.1 10.8 11.7 11.1 23.7 (4.9)

Gross NPAs (%) 1.9 1.9 2.3 2.4 2.3 44.7 (4.6)

Net NPAs (%) 0.9 0.9 1.0 1.0 1.0 10.9 (8.3)

Coverage Ratio (%) 54.7 50.8 55.5 56.0 58.7 398.6 268.5

Restructured Book (%) 0.7 0.2 0.4 0.4 0.3 (35.2) (6.1)

Source: Banks, HDFC sec Inst Research; Proforma of VYSB + KMB for 3QFY15; 4QFY15 - KMB standalone; 1QFY16 onwards merged entity

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KMB : Snapshot

Rs bn FY13 FY14 FY15 FY16E FY17E FY18E

Loans 484.7 530.3 661.6 1,197.3 1,398.7 1,659.4Chg (%) 24.0 9.4 24.8 12.2 16.8 18.6

Deposits 510.3 590.7 748.6 1,348.4 1,589.4 1,885.7

Chg (%) 32.4 15.8 26.7 11.6 17.9 18.6

Net Interest Income 32.1 37.2 61.7 73.3 85.1 97.5

Chg (%) 27.6 16.0 65.8 18.8 16.2 14.5

NIM (%) 4.6 4.6 4.7 4.4 4.6 4.5

Core C-I Ratio (%) 52.5 51.5 54.8 60.9 57.2 55.3

PPOP 21.6 25.8 41.9 41.5 52.9 63.2

Chg (%) 30.3 19.5 62.6 (1.1) 27.5 19.5

PBT 19.7 22.7 37.5 31.3 44.4 54.8

Chg (%) 23.3 15.2 65.2 (16.7) 42.1 23.4

PAT 13.6 15.0 24.8 20.8 29.6 36.5

Chg (%) 25.4 10.4 65.1 (16.1) 42.1 23.4

EPS (Rs) 18.2 19.5 24.2 11.4 16.1 19.9

Core ABV (Rs) 117.2 145.9 168.3 118.1 131.2 148.8

Core RoAA (%) 1.83 1.76 1.94 1.41 1.45 1.54

Core RoAE (%) 15.6 13.83 14.13 11.00 11.83 13.40

GNPA (%) 1.6 2.0 1.9 2.3 2.3 2.0

NNPA (%) 0.6 1.1 0.9 1.2 1.2 0.9


KOTAK MAHINDRA BANK INITIATING COVERAGE

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KMB : Standalone Financials


(Rs mn) FY14 FY15 FY16E FY17E FY18E

Interest Earned 87,671 97,199 162,546 202,258 233,116

Interest Expended 50,471 54,961 89,266 117,119 135,644

Net Interest Income 37,200 42,237 73,280 85,140 97,472

Other Income 13,997 20,285 26,649 32,593 39,329

Fee Income (CEB) 8,531 12,263 17,361 22,029 28,210

Treasury Income 1,818 3,148 3,875 4,250 3,750

Total Income 51,198 62,522 99,930 117,733 136,801

Total Operating Exp 25,426 32,547 58,473 64,856 73,626

Employee Expense 11,722 14,667 29,120 32,521 36,719PPOP 25,772 29,975 41,456 52,877 63,175

Provisions 3,047 1,645 10,202 8,468 8,382

Prov. for NPAs (incl.

std prov.)1,473 2,582 9,727 7,993 7,907

PBT 22,725 28,330 31,255 44,409 54,793

Provision for Tax 7,699 9,670 10,439 14,833 18,301

PAT 15,025 18,660 20,816 29,576 36,492


SOURCES OF FUNDS

Share Capital 3,852 3,862 9,163 9,163 9,163

Reserves 118,899 137,579 227,754 253,860 286,080

Shareholder's Funds 122,751 141,441 236,917 263,022 295,243

Savings 100,870 140,361 272,332 359,478 458,334

Current 87,408 131,813 214,883 231,000 248,325

Term Deposit 402,445 476,429 861,205 998,912 1,179,038

Total Deposits 590,723 748,603 1,348,420 1,589,390 1,885,697

Borrowings 129,041 121,497 223,789 246,166 270,779Other Liabilities 33,338 48,580 85,054 93,559 102,915

Total Liabilities 875,853 1,060,121 1,894,179 2,192,136 2,554,634

APPLICATION OF

FUNDS

Cash & Bank Balance 59,799 62,624 141,737 160,047 171,731

Investments 254,845 304,211 480,040 551,435 633,296

G-Secs 174,654 228,817 401,155 468,870 546,852

Advances 530,276 661,607 1,197,287 1,398,663 1,659,414Fixed Assets 11,069 12,067 16,291 17,920 19,712

Other Assets 19,863 19,612 58,824 64,072 70,482

Total Assets 875,853 1,060,121 1,894,179 2,192,136 2,554,634

Income Statement Balance Sheet



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KMB Financials


Valuation ratiosEPS 19.5 24.2 11.4 16.1 19.9

Earnings growth (%) 10.4 24.2 11.6 42.1 23.4

BVPS (ex reval.) 153.4 176.2 126.1 140.0 157.2

Adj. BVPS (Core) 145.9 168.3 118.1 131.2 148.8

ROAA (%) 1.76 1.94 1.41 1.45 1.54

ROAE (%) 13.8 14.1 11.0 11.8 13.1

ROAE (%) (Core) 13.8 14.1 11.0 11.8 13.4

Core P/E (x) 25.7 18.4 50.2 34.3 26.7

Core P/ABV (x) 3.43 2.64 4.83 4.22 3.58

P/PPOP (x) 10.2 8.8 15.1 11.9 9.9Dividend Yield (%) 0.1 0.1 0.1 0.1 0.1

PROFITABILITY

Yield on Advances (%) 13.2 12.5 12.7 12.2 12.0

Yield on Investment (%) 7.5 7.9 8.0 7.9 7.8

Cost of Funds (%) 7.0 6.9 7.3 6.9 6.8

Cost of Deposits (%) 6.9 6.8 6.7 6.6 6.5

Core Spread (%) 6.1 5.6 5.4 5.4 5.2

NIM (%) 4.6 4.7 4.4 4.6 4.5

OPERATING

EFFICIENCYCost/Avg. Asset Ratio

(%)3.0 3.4 4.0 3.2 3.1

Cost-Income Ratio (Excl

Treasury)51.5 54.8 60.9 57.2 55.3



BALANCE SHEETSTRUCTURE RATIOS

Loan Growth (%) 9.4 24.8 81.0 16.8 18.6

Deposit Growth (%) 15.8 26.7 80.1 17.9 18.6

C/D Ratio (%) 89.8 88.4 88.8 88.0 88.0

Equity/Assets (%) 14.0 13.3 12.512.0

11.6

Equity/Advances (%) 23.1 21.4 19.8 18.8 17.8

CASA (%) 31.9 36.4 36.1 37.2 37.5

Total Capital Adequacy

Ratio (CAR)

18.8 17.2 16.7 15.8 15.0

Tier I CAR 17.8 16.2 16.1 15.3 14.6

ASSET QUALITY

Gross NPLs (Rs bn) 10.6 12.4 27.9 32.0 32.8

Net NPLs (Rs bn) 5.7 6.1 14.6 16.1 15.4

Gross NPLs (%) 2.0 1.9 2.3 2.3 2.0

Net NPLs (%) 1.1 0.9 1.2 1.2 0.9

Coverage Ratio (%) 45.9 50.8 47.8 49.5 53.2

Provision/Avg. Loans (%) 0.3 0.4 1.0 0.6 0.5

ROAA TREE

Net Interest Income 4.34% 4.36% 4.96% 4.17% 4.11%Non Interest Income 1.63% 2.10% 1.80% 1.60% 1.66%

Treasury Income 0.21% 0.33% 0.26% 0.21% 0.16%

Operating Cost 2.97% 3.36% 3.96% 3.17% 3.10%

Provisions 0.36% 0.17% 0.69% 0.41% 0.35%

Provisions for NPAs 0.15% 0.20% 0.48% 0.35% 0.30%

Tax 0.90% 1.00% 0.71% 0.73% 0.77%

ROAA 1.75% 1.93% 1.41% 1.45% 1.54%

Leverage (x) 7.89 7.33 7.81 8.17 8.50

ROAE 13.83% 14.13% 11.00% 11.83% 13.07%


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Banks : Peer valuation

Source: HDFC sec Inst Research, #Adjusted for subsidiaries

Mcap

(Rs bn)

CMP

(Rs)

RatingTP

(Rs)

ABV (Rs) P/E (x) P/ABV (x) RoAE (%) RoAA (%)

FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18EAXSB 1,053 444 BUY 537 206 236 275 12.7 11.2 9.6 2.16 1.88 1.62 17.2 16.9 17.1 1.67 1.61 1.56

CUB 55 93 BUY 107 46 53 60 12.3 11.0 9.4 2.03 1.77 1.55 15.7 15.5 15.9 1.52 1.50 1.53

DCBB 22 76 BUY 101 57 63 69 12.8 12.7 10.0 1.33 1.22 1.10 10.1 9.2 10.6 0.95 0.77 0.79

FB 80 47 BUY 69 43 48 53 12.4 9.1 7.7 1.08 0.98 0.88 8.0 10.0 10.9 0.74 0.89 0.91

ICICIBC # 1,379 238 BUY 285 113 124 141 8.7 8.3 6.4 1.62 1.42 1.18 14.2 12.4 13.9 1.78 1.58 1.70

IIB 558 946 BUY 1,045 289 333 387 24.1 18.4 14.9 3.27 2.84 2.44 16.8 16.3 17.4 1.88 1.98 1.99

KMB# 1,255 685 BUY 747 118 131 149 50.2 34.3 26.7 4.83 4.22 3.58 10.7 11.9 13.4 1.38 1.45 1.54

BOB 337 146 BUY 147 74 88 113-17.3 13.6 8.5 1.96 1.66 1.29

-5.0 6.3 9.4 -0.27 0.32 0.46

OBC 27 89 BUY 124 172 177 212 8.8 4.0 3.3 0.52 0.50 0.42 2.3 4.9 5.6 0.13 0.27 0.30

SBIN # 1,530 197 BUY 218 110 115 132 9.8 8.1 6.2 1.26 1.22 1.02 8.7 9.6 11.3 0.51 0.57 0.65

UNBK 89 129 BUY 137 137 152 179 6.2 4.0 3.1 0.94 0.85 0.72 7.4 10.3 12.3 0.37 0.53 0.63


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Lending Business : Kotak Mahindra Prime

Kotak Mahindra Prime

(KMP)

Total Loans

Rs 219bn

Total carLoans

Rs 164bn

Calc. NIM (%)

4.7%

NNPA (%)

0.4%

RoAA (%)

2.4%

Contribution toconsol

Loans : 15%

PAT : 15%

Per sharevalue forKMB: Rs77/share

Data as of Dec-15; per share vale after 20% holdo discount


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KMP - Car finance

KMP is a leading NBFC that provides asset financing for

passenger cars, multi-utility vehicles and pre-owned cars. It also

offers inventory and infrastructure funding to car dealers. As of

FY15, KMP contributed ~22% of total loans and ~17% of

consolidated profits of KMB

As of Dec-2015, KMP had 78 branches in 18 states and a wide

network of direct marketing associates, brokers and agencies.

KMP’s disbursements and AUM grew at 9% and 12.6% CAGR

during FY12-15. With ~30bps fall in calculated NIM (5%), core

earnings grew ~12%. Further, a ~40% rise GNPAs (Rs 1.5bn,

77bps) pushed up provisioning cost by ~49% CAGR. This, in

turn, resulted in PAT growth of

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KMP : Industry leading auto financier

ROAA


PAT & Growth

NNPA :

(5.0)

-

5.0

10.0

15.0

20.0

25.0

30.0

800

900

1,000

1,100

1,200

1,300

1,400

1,500

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6

KMP - PAT (LHS) YoYRs mn %

2.7

3.1

2.7

2.9

2.7

2.9

2.9

2.9

2.7

2.7

2.5

2.9

2.4

2.6

2.4

2.0

2.2

2.4

2.6

2.8

3.0

3.2

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6

%

0

0.1

0.2

0.3

0.4

0.5

0.6

0

200

400

600

800

1,000

1,200

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6

NNPA (LHS) NNPA (RHS %)Rs mn %


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KMP : Financials


Quarterly (Rs bn) 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16

Total Loans 170.9 169.5 168.6 173.7 185.2 188.2 190.7 197.1 197.3 200.1 218.5

YoY (%) 21.1 11.7 5.1 2.1 8.3 11.0 13.1 13.4 6.5 6.3 14.6Car Loans 130.6 131.4 130.7 132.7 134.2 139.5 142.3 147.3 150.7 157.5 164.3

YoY (%) 17.0 11.7 6.8 3.9 2.8 6.2 8.9 10.9 12.3 13.0 15.4

% of total loans 76.4 77.5 77.5 76.4 72.5 74.1 74.6 74.7 76.4 78.7 75.2

Net Interest Income 2.1 2.2 2.2 2.4 2.2 2.3 2.2 2.5 2.4 2.4 2.5

YoY (%) 31.4 25.0 5.9 20.6 5.4 3.2 2.3 5.0 8.8 4.4 12.3

cal. NIM (%) 4.8 5.2 5.1 5.6 4.8 4.9 4.6 5.2 4.8 4.8 4.7

Total Income 25.3 26.5 26.0 28.3 26.7 27.8 26.8 30.9 27.7 29.8 29.7

YoY (%) 26.5 17.8 6.6 17.9 5.5 4.9 3.1 9.2 3.7 7.2 10.8

PBT 1.8 1.9 1.9 1.9 1.8 1.9 1.8 2.2 1.8 2.0 1.9

YoY (%) 28.8 12.4 20.3 10.3 2.2 (0.5) (3.7) 13.5 - 2.6 5.5PAT 1.2 1.3 1.2 1.3 1.2 1.3 1.2 1.4 1.2 1.3 1.3

YoY (%) 24.5 9.6 17.1 5.9 2.6 - (2.4) 13.5 (0.8) 1.6 5.0

NNPA (Rs mn) 310.0 510.0 630.0 560.0 650.0 640.0 830.0 788.3 986.4 800.5 874.0

NNPA (%) 0.2 0.3 0.4 0.3 0.3 0.3 0.4 0.4 0.5 0.4 0.4

(Rs bn) FY15 FY16E FY17E FY18E

Total Loans 191.5 214.2 244.4 284.6

YoY (%) 10.0 11.9 14.1 16.5

Net Interest Income 9.1 10.0 11.1 12.7

YoY (%) 6.6 10.0 11.2 14.8

Calc. NIM (%) 4.96 4.91 4.83 4.81

PBT 7.7 8.3 9.2 10.5

YoY (%) 3.0 7.0 10.5 15.0

PAT 5.1 5.4 6.0 6.9

YoY (%) 3.3 7.0 10.5 15.0

RoAA (%) 2.78 2.68 2.61 2.61

RoAE (%) 16.4 15.0 14.3 14.3

GNPA (%) 0.8 0.8 0.8 0.8

NNPA (%) 0.4 0.4 0.3 0.3

RoAA TREE FY15 FY16E FY17E FY18E

Net Interest Income 4.96% 4.91% 4.83% 4.81%

Non Interest Income 1.18% 1.18% 1.15% 1.10%

Operating Cost 1.78% 1.81% 1.79% 1.75%

Provisions 0.12% 0.20% 0.20% 0.19%

Tax 1.46% 1.41% 1.38% 1.37%

ROAA 2.78% 2.68% 2.61% 2.61%

Leverage (x) 5.90 5.60 5.47 5.47

ROAE 16.39 % 14.99% 14.30% 14.26%


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Kotak Mahindra Investments : LAS# business

Kotak Mahindra Investments

(KMI)

Total Loans

Rs 47.6bn

Calc NIM (%)

6.4%NNPA (%)

0.06%

RoAA (%)

4.5%

Contribution to

Loans : 3.4%

PAT : 4.3%

Per share value forKMB: Rs 12


# Loans against securities


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KMI : LAS Business

Kotak Mahindra Investments is primarily in the loan-against-

securities (LAS) business. It also lends to several corporates and

the real estate sector. As of FY15, KMI contributed ~3.7% of

total loans and ~3.5% of consolidated profits.

AUM growth of ~64% (100%+ in FY15) CAGR and ~120bps rise

in calc. NIM led to ~54% rise in core earnings over FY12-15.

Further, with flat provisions, net earnings grew ~115% CAGR.

For 9MFY16, AUM grew ~58% YoY, thus leading to core and net

earnings growth of ~60% each. Asset quality was unblemished

with NNPAs at a mere 6bps. It contributed ~3.4% of total loans

and 4.3% of consolidated earnings.

We have assigned 2.5x to KMI’s core adj. networth to arrive at

a fair value of Rs 28.1bn i.e Rs 15.4 per share of KMB. After a

20% holdco discount, KMI contributes Rs 12/sh to our SOTP


Total Income and PAT : Quarterly trend

NNPA (%) : remains comfortableCustomer assets : Strong growth momentum

8.6 7.411.7

15.6

23.8 23.6

30.2 32.7 34.3

40.2

47.6

-

10.0

20.0

30.0

40.0

50.0

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6

Rs bn

2 . 2

2 . 0

1 . 0

0 . 5

0 . 5 0

. 2

0 . 2

0 . 1

0 . 1 0

. 1

0 . 1

0.00

0.50

1.00

1.50

2.00

2.50

0

50

100

150

200

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6

NNPA (Rs mn) NNPA (%; RHS)

1 4 0 2

1 0

2 3 0 3

1 0 3

6 0

4 7 0

4 7 0

7 1 0

5 6 0

6 8 0 7

3 0

1 0

1 1 0

1 1 0 1

6 0

1 7 0 2

5 0

2 4 0

4 0 0

3 0 0 3

6 0

3 9 0

0

100

200

300

400

500

600

700

800

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6

Total Income PATRs mn


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KMI : Financials


Rs bn FY15 FY16E FY17E FY18E

Total Loans 32.1 36.9 42.5 48.8

YoY (%) 107.6 15.0 15.0 15.0

Net Interest Income 1.74 2.46 2.70 2.97

YoY (%) 121.4 40.9 10.0 9.7

Calc. NIM (%) 6.83 6.60 6.31 6.02

PBT 1.58 2.26 2.47 2.71

YoY (%) 145.7 42.6 9.5 9.7PAT 1.06 1.50 1.64 1.80

YoY (%) 152.9 41.0 9.5 9.7

RoAA (%) 4.47 4.34 4.14 3.95

RoAE (%) 20.20 21.67 19.35 17.65

Rs mn 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16

Total Loans 8600 7410 11740 15550 23830 23590 30200 32680 34310 40240 47610

YoY (%) 177.1 218.4 157.2 110.2 44.0 70.6 57.6NII 130 200 190 270 300 390 440 500 480 630 700

YoY (%) 130.8 95.0 131.6 85.2 60.0 61.5 59.1

Calc. NIM - 10.0 7.9 7.9 6.1 6.6 6.5 6.4 5.7 6.8 6.4

Total Income 140 210 230 310 360 470 470 710 560 680 730

YoY (%) 157.1 123.8 104.3 129.0 55.6 44.7 55.3

PBT 70 180 160 240 260 380 370 570 460 550 600

YoY (%) 271.4 111.1 131.3 137.5 76.9 44.7 62.2

PAT 10 110 110 160 170 250 240 400 300 360 390

YoY (%) 1,600.0 127.3 118.2 150.0 76.5 44.0 62.5

ROAA Tree FY15 FY16E FY17E FY18E

Net Interest Income 6.5% 6.3% 6.2% 6.1%

Non Interest Income 1.0% 0.7% 0.7% 0.6%

Operating Cost 1.4% 1.0% 1.0% 0.9%

Provisions 0.2% 0.2% 0.2% 0.2%

Tax 1.9% 1.9% 1.9% 1.9%

ROAA 4.0% 3.8% 3.8% 3.7%

Leverage(x) 5.1 5.6 5.2 5.0

ROAE 20.2% 21.7% 19.8% 18.4%


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33

Capital Market Business

Kotak Securities (K-sec)

Avg Daily Vol.

64.8bn

Market share

2.7%Total income

Rs 7.48bn

Net earnings

Rs 2.0bn

Contribution to

PAT : 8.3%

Per share value forKMB: Rs 21



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Kotak Securities (K-Sec)

One of the leading domestic brokerage houses in the country, K-

Sec has more than 1,197 branches across 352 cities, with over

1.1mn customer ACs. It has maintained its market share in the

2.7-2.9% range over the past seven quarters. K-Sec contributed

~9.5% of consolidated earnings as of FY15.

Pick-up in macros, improving pipeline for IPO/OFS and

disinvestments, coupled with deeper product offering to e-

VYSB customers, will drive momentum.

Over FY16-18E, we have factored in a total income growth of

6% CAGR with 8% volume growth. PAT growth is expected to

be a mere 4% CAGR.

We have assigned 15x to K-Sec’s net earnings to arrive at

valuations of Rs 49bn i.e Rs 26.8 per share of KMB. After a

20% holdco discount, K-Sec contributes Rs 21/sh to our SOTP

Volume and Market share

Total income : Quarterly trend PAT : Quarterly trend

(20.0)

-

20.0

40.0

60.0

80.0

100.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6

Total Income (Rs bn) YoY (%) RHS

(100.0)

(50.0)

-

50.0

100.0

150.0

200.0

250.0

300.0

0

200

400

600

800

1,000

1,200

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6

PAT (LHS) YoYRs mn %


2.0

2.2

2.4

2.6

2.8

3.0

0.0

20.0

40.0

60.0

80.0

100.0

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6

Avg Daily Vol ( bn) Market S hare ( %) R HS


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35

K-Sec : Financials


K Sec (Rs mn) 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16

K Sec Vol (bn) 36.92 42.48 37.2 39.46 60.53 66.21 73.78 83.72 78.13 75.93 64.81Market Shares (%) 2.2 2.4 2.3 2.4 2.9 2.7 2.8 2.9 2.7 2.7 2.7

Total Income 1470 1520 1680 1600 2230 2240 2230 2890 2500 2700 2280

YoY (%) 11.4 (1.9) 15.1 (1.8) 51.7 47.4 32.7 80.6 12.1 20.5 2.2

Brokerage (bps) 0.07 0.06 0.08 0.07 0.06 0.06 0.05 0.06 0.05 0.06 0.06

PBT 480 600 710 550 1030 1000 910 1470 1020 1200 830

YoY (%) 37.1 1.7 24.6 48.6 114.6 66.7 28.2 167.3 (1.0) 20.0 (8.8)

PAT 310 400 460 440 680 660 600 960 670 780 550

YoY (%) 34.8 - 21.1 238.5 119.4 65.0 30.4 118.2 (1.5) 18.2 (8.3)


Avg. Daily Vol (bn) 39.03 71.07 76.40 80.22 89.85

YoY (%) 10.5 82.1 7.5 5.0 12.0

Total Income 6,269 9,598 10,036 10,341 11,361

YoY (%) 8.3 53.1 4.6 3.0 9.9

PBT 2,343 4,414 4,015 4,343 4,999

YoY (%) 24.3 88.4 (9.0) 8.2 15.1

PAT 1,602 2,896 2,634 2,849 3,279

YoY (%) 39.9 80.8 (9.0) 8.2 15.1


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Kotak Asset Management Company (K-AMC)

Avg. AUM

Rs551bn

Equity AUMRs 131bn;

~14% share

Off shore AUM

Rs211bn; 22%share

AlternateFunds

Rs 56bn; 6%share

Total income

Rs 780mn

Contribution to

PAT : 2.0%

Per sharevalue for

KMB: Rs 24

Data as of Dec-15; per share vale after 20% holdo discount and includes Rs 9 for Alternative and offshore funds


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Kotak AMC

Avg AUM

Total Income and PAT

2 8 0

2 3 0

4 1 0

3 7 0

3 7 0

5 1 0

4 7 0

4 2 0

2 9 0 3

6 0

3 2 0

3 8 0

5 4 0

5 9 0

5 9 0

(400)

(200)

0

200

400

600

800

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6

Total Income PAT

Of the country’s ~43 fund houses that had Rs 13.4trn average

assets under management (AAUM) at the end of Feb 2015,

Kotak ranks 8th with an AAUM size of Rs 589bn. Its market has

improved to 4.4% vs. 3.4/3.9% in Mar-15/Mar-14 and has

moved up from the 9th position in the same period.

The e-VYSB merger with a new clientele from various

geographies will help grow AUMs for Kotak AMC.

Over FY16-18E, we have factored in AUM CAGR of ~10% thus,

leading to total income growth of 7% CAGR. PAT growth is

expected to be 9% CAGR. We have valued domestic AUMs at 5% FY18E to arrive at

valuation of Rs 35.3bn i.e. Rs 19.3 /share of KMB (i.e. 2.6% of

total TP). After a 20% holdco discount, K-AMC contributes Rs

15/sh to our SOTP

We expect alternative assets’ business to grow at a mere 5%

CAGR over FY16-18E. We value this business at 7.5% FY18E

AUM of Rs 65.3bn to arrive at valuation of Rs 4.9bn i.e. Rs 2.7/

Share of KMB. After a 20% holdco discount, Alternative assetscontributes Rs 2/sh to our SOTP

Over FY16-18E, we have factored ~12% CAGR in the offshore

AUMs. At 5% of FY18E AUMs of Rs 292bn, we assign valuation

of Rs 14.5bn i.e. Rs 8/share for KMB. After a 20% holdco

discount, offshore assets contributes Rs 6/sh to our SOTP

47 48 50 48 52 51 48 45 47 43 40 36 41 39 42

6 6 5 55 5 6 6 7 9 10 12

14 14 14

16 18 17 18 1616 17 18 18 19 22 26 23 25

22

19 17 18 19 17 17 18 20 18 19 18 18 18 15 15

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6

Debt Equity Alternate assets Offshore Funds Insurance PMS



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Kotak AMC : Financials


1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16

AUM (Rs bn) 628 605 599 566 666 657 714 806 942 960 957

Debt (%) 52 51 48 45 47 43 40 36 41 39 42

Equity (%) 5 5 6 6 7 9 10 12 14 14 14

Alternate Assets (%) 8 10 10 10 9 9 9 7 6 6 6

Offshore Funds(%) 16 16 17 18 18 19 22 26 23 25 22

Insurance (%) 17 17 18 20 18 19 18 18 18 15 15

PMS (%) 2 1 1 1 1 1 1 1 1 1 0

Total Income (Rs mn) 370 510 470 420 290 360 320 380 540 590 590

YoY (%) 32.1 121.7 14.6 13.5 (21.6) (29.4) (31.9) (9.5) 86.2 63.9 84.4

PBT (Rs mn) 110 260 180 50 0 0 -90 -160 210 240 130

PAT (Rs mn) 70 170 120 40 0 -10 -10 -180 200 230 40

Rs mn FY13 FY14 FY15 FY16E FY17E FY18E

Average AUM (Rs bn) 359 335 417 583 641 706

Growth YoY 16.8 (6.8) 24.3 40.0 10.0 10.0Total Income 1,171 1,770 1,370 2,041 2,181 2,328

Chg (%) 2.4 51.2 (22.6) 49.0 6.9 6.8

PBT 29.5 600.0 (250.0) 714.3 790.6 855.7

Chg (%) (85.4) 1,936.7 (141.7) (385.7) 10.7 8.2

PAT 34.7 410.0 (290.0) 471.5 521.8 564.8

Chg (%) (75.8) 1,082.5 (170.7) (262.6) 10.7 8.2


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Kotak Mahindra Capital Co (KMCC)

Total Income

Rs 780mn

PAT

Rs160mnContribution to

PAT : ~1%

Per share value for KMB:Re 1



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KMCC : Investment Banking

KMCC : Financials KMCC is one of the leading Investment Banks in India. In FY15,

KMCC successfully completed 17 marquee transactions across

various product formats. On the equity side, KMCC successfullycompleted two IPOs, two government disinvestments, one IPP,

four block deals and eight QIPs, raising a total of Rs 347bn, and

was ranked the no. 1 book running lead manager.

We have factored income growth of 11% CAGR and net

earnings CAGR of 6.5% over FY16-18E.

We have assigned 1x to KMCC’s core networth to arrive at a

fair value of Rs 2.6bn / Rs 1.4 per share of KMB (i.e. 0.2% of

total TP). After a 20% holdco discount, KMCC contributes Re1/sh to our SOTP

(Rs mn) 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16

Total Income 220.0 120.0 260.0 250.0 120.0 110.0 130.0 520.0 210.0 290.0 280.0

Chg (%) (4.3) (40.0) 44.4 13.6 (45.5) (8.3) (50.0) 108.0 75.0 163.6 115.4

PBT 50.0 (30.0) 80.0 70.0 (60.0) (70.0) (60.0) 350.0 30.0 120.0 80.0

Chg (%) (37.5) (150.0) 166.7 16.7 (220.0) 133.3 (175.0) 400.0 (150.0) (271.4) (233.3)PAT 40.0 (20.0) 70.0 50.0 (40.0) (70.0) (60.0) 300.0 30.0 70.0 60.0

Chg (%) (33.3) (150.0) 250.0 25.0 (200.0) 250.0 (185.7) 500.0 (175.0) (200.0) (200.0)


Total Income 840 890 1,024 1,100 1,265

YoY (%) 0.9 6.0 15.0 7.5 15.0

PBT 180 160 189 193 215

YoY (%) (23.5) (11.1) 18.3 1.7 11.7

PAT 140 130 126 128 143

YoY (%) (16.2) (7.1) (3.1) 1.7 11.7

KMCC : Quarterly trend



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41

Kotak Life Insurance Co.

Kotak Life Insurance Company (Kotak Life)

AUM

Rs 147.6bn

Total PAT

Rs 1.74bn

Solvency Ratio

3.2%

Per share value for KMB:Rs 16



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Kotak Life Insurance (K-life)

Solvency Ratio (%)AUM

Kotak Life Insurance is a 74:26 JV between KMB (and its

subsidiaries) and Old Mutual. It is one of the fastest growing life

insurance cos with market share of ~1.5% (Feb-16). K-Life

contributed ~14% to the total AUMs and ~7.5% to total profits

as on FY15.

We have factored APE CAGR of ~22% over FY16-18E and NBAP

margins of ~16%. We value K-Life at Rs 36.8bn (74% stake) i.e.

~Rs 20/share. After a 20% holdco discount, K-life contributes

Rs 16/sh to our SOTP

PAT and Growth

(50.0)

-

50.0

100.0

150.0

-

100

200

300

400

500

600

700

800

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6

PAT (Rs mn) YoY (%, RHS)

-

5.0

10.0

15.0

20.0

25.0

30.0

-

20

40

60

80

100

120

140

160

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6

AUM (Rs bn) YoY (%, RHS)

3.02.9

2.9 2.9

3.0

3.13.2

3.03.1

3.03.0

3.1

3.2

3.23.2

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6

%



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Rating Definitions

BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period

NEUTRAL : Where the stock is expected to deliver (-) 10% to 10% returns over the next 12 month period

SELL : Where the stock is expected to deliver less than (-) 10% returns over the next 12 month period

500

550

600

650

700

750800

M a r - 1 5

A p r - 1 5

M a y - 1 5

J u n - 1 5

J u l - 1 5

A u g - 1 5

S e p - 1 5

O c t - 1 5

N o v - 1 5

D e c - 1 5

J a n - 1 6

F e b - 1 6

M a r - 1 6

Kotak Mahindra Bank TP Date CMP Reco Target

30-Mar-16

685

BUY

747

RECOMMENDATION HISTORY


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HDFC securities

Institutional Equities

Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park, Senapati Bapat Marg, Lower Parel,

Mumbai - 400 013

Disclosure:We, Darpin Shah, MBA, Siji Philip, MBA, and Parul Gulati, MBA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accuratelyreflect 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) orview(s) in this report.Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associatemay have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or hisrelative or HDFC Securities Ltd. or its associate does not have any material conflict of interest.Any holding in stock – No

Disclaimer:This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled orarrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty,express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only.Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation ofan offer, to buy or sell any securities or other financial instruments.This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident or located in any locality,state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject HDFC Securities Ltd or itsaffiliates to any registration or licensing requirement within such jurisdiction.If this report is inadvertently send or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This document may not bereproduced, distributed or published for any purposes without prior written approval of HDFC Securities Ltd .Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derived fromthem. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk.It should not be considered to be taken as an offer to sell or a solicitation to buy any security. HDFC Securities Ltd may from time to time solicit from, or perform broking, or other services for, anycompany mentioned in this mail and/or its attachments.HDFC Securities and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies)mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of thecompany(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and otherrela

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