RESULT UPDATE

KOTAK MAHINDRA BANK

Firing on all cylinders
India Equity Research| Banking and Financial Services
COMPANYNAME
Kotak Mahindra Bank’s (KMB) Q3FY18 earnings reflected robust EDELWEISS 4D RATINGS
performance across all business segments. Credit growth sustained upward
Absolute Rating BUY
momentum (>23%, at pre-merger level). However, some pressure on NIMs Rating Relative to Sector Outperformer
(at 4.2%, down 10bps QoQ/30bps YoY) arrested similar traction in revenue. Risk Rating Relative to Sector Medium
Pristine asset quality was maintained—overall stress (GNPLs + Sector Relative to Market Overweight
restructured) at 2.35% with credit cost contained at <60bps. Commendably,
liability franchise continued to strengthen with average SA jumping 60%
YoY, raising CASA ratio to ~47%. Moreover, strong tailwinds buoying MARKET DATA (R: KTKM.BO, B: KMB IN)
financial savings businesses were icing on the cake (capital market-related CMP : INR 1,061
businesses clocked >75% earnings growth). We maintain our stance that Target Price : INR 1,240
52-week range (INR) : 1,115 / 718
KMB has laid a strong foundation—liability franchise, digitisation, capital
Share in issue (mn) : 1,904.7
position and limited stress hit—for a scalable and profitable model (refer
M cap (INR bn/USD mn) : 2,020 / 31,635
our note, Building blocks in place for profitable scale). Maintain BUY with Avg. Daily Vol.BSE/NSE(‘000) : 2,377.8
target price of INR1,240.
SHARE HOLDING PATTERN (%)
Revenue synergies to crystalising Current Q2FY18 Q1FY18
Integration challenges along with demonetisation/GST weighed on KMB’s loan growth Promoters * 30.1 30.1 30.1
(sub-15% growth post merger versus 25% plus earlier). However, the bank’s performance MF's, FI's & BK’s 9.0 8.5 8.2
over the past three quarters indicates that synergy benefits have started crystallising, FII's 39.4 39.9 40.2
with loan growth crossing 23% in Q3FY18. This was led by CV, home loans/LAP and Others 21.6 21.6 21.5
unsecured portfolio within retail and spurt in corporate demand. * Promoters pledged shares : NIL
(% of share in issue)

Strong foundation in place for profitable scale

PRICE PERFORMANCE (%)
More impressively, the liability franchise continued to strengthen (savings base has
EW Banks and
nearly doubled over the past two years) and KMB is also investing in digital initiatives— Stock Nifty Financial
transforming the way business is sourced and transacted (811 is a case in point). We Services Index
expect this trend to sustain given: a) superior rate offerings; and b) better flow through in 1 month (0.3) 4.4 3.7
eIVBL branches. Robust franchise, limited stress baggage, strong capital position and 3 months (4.8) 5.4 7.7
digital initiatives equip KMB to cash in on growth opportunities. 12 months 41.5 28.5 36.4

Outlook and valuations: Synergies playing out; maintain ‘BUY’

9mFY18 performance reflects synergy benefits playing through on cost as well as revenue
fronts. We are enthused by KMB’s credible effort in laying foundation of a scalable and
profitable business model. With significant benefits likely to flow from formalisation of
financial savings, we anticipate strong business tailwinds for subsidiaries. At CMP the
stock traded at 3.1x FY20 P/BV. Maintain ‘BUY/SP’ with TP of INR1,240.
Financials (INR mn)
Year to March Q3FY18 Q3FY17 Growth (%) Q2FY18 Growth (%) FY17 FY18E FY19E Kunal Shah
Net revenue 57,673 39,432 46.3 51,901 11.1 154,052 182,488 214,976 +91 22 4040 7579
kunal.shah@edelweissfin.com
Net profit 15,271 11,985 27.4 13,406 13.9 46,707 59,589 74,216
Dil. EPS (INR) 25.4 31.3 39.0 Prakhar Agarwal
Adj. BV (INR) 188.5 239.7 274.9 +91 22 6620 3076
Price/ Adj book (x) * 5.3 4.2 3.6 prakhar.agarwal@edelweissfin.com
Price/ Earnings (x) * 40.6 32.8 26.2
January 19, 2018
* adj for insurance
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
 Banking and Financial Services

Asset quality holding fort

Asset quality continued to be best-in-class with GNPLs at 2.31% (2.47% in Q2FY18). Even
credit cost stood at <60bps versus 61bps in FY17 and 82bps in FY16. This continues to be in
line with management’s guidance, which indicates continued directional improvement in
credit cost in FY18 (implying <60bps credit cost). Additionally, marginal stress baggage via
SMA-2 accounts (INR3bn, 0.19% of loans) and even factoring evolution of potential stress,
viz., 5:25/restructured book/SRs, lends comfort. Given superior retail franchise and
stringent risk management framework (no divergence with RBI), KMB seems to be better
placed than other corporate banks.

Other highlights
 Opex during the quarter was relatively higher due to continued marketing and
advertising expenses related to 811 scheme.

 Significant growth in subsidiaries namely securities, IB, asset management and life
insurance business – actual growth in earnings of non-financing business is >75% (bank
still owns 100% of these businesses).

Table 1: Commercial banking – Key metrics

(INR mn) Q3FY18 Q3FY17 Growth (%) Q2FY18 Growth (%) FY16 FY17 Growth (%)
Net interest income 23,937 20,503 16.7 23,127 3.5 69,004 81,262 17.8
Pre-provisioning profits 18,201 15,277 19.1 17,248 5.5 40,411 59,848 48.1
Provisions 2,128 1,921 10.8 2,165 (1.7) 9,174 8,367 (8.8)
PBT 16,073 13,356 20.3 15,083 6.6 31,237 51,481 64.8
Tax 5,541 4,558 21.5 5,140 7.8 10,339 17,366 68.0
PAT 10,532 8,798 19.7 9,943 5.9 20,898 34,115 63.2
Advances 1,590,710 1,292,610 23.1 1,525,740 4.3 1,186,650 1,360,820 14.7
Deposits 1,808,260 1,493,520 21.1 1,656,710 9.1 1,386,430 1,574,260 13.5

Other business updates

Table 2: Business-wise profitability

Year to March Q318 Q317 Growth (%) Q218 Growth (%) FY16 FY17 Growth (%)
Kotak Mahindra Bank (merged, standalone) 10,530 8,800 19.7 9,940 5.9 20,910 34,110 63.1
Kotak Mahindra Prime 1,480 1,330 11.3 1,500 (1.3) 5,030 5,160 2.6
Kotak Mahindra Capital Company 360 70 414.3 (10) (3,700.0) 330 460 39.4
Kotak Securities 1,540 850 81.2 1,180 30.5 2,510 3,620 44.2
International subsidiaries 320 220 45.5 280 14.3 1,050 870 (17.1)
Kotak Mahindra AMC & Trustee Co 380 160 137.5 230 65.2 720 550 (23.6)
Kotak Mahindra Investments 500 480 4.2 550 (9.1) 1,550 1,970 27.1
Total consolidated profit after tax 15,230 11,820 28.8 13,650 11.6 32,040 46,500 45.1
Equity affiliates/Minority int & others 40 170 NA (240) NA 50 (120) NA
PAT (excluding life insurance) 15,270 11,990 27.4 13,410 13.9 32,090 46,380 44.5
Kotak Life Insurance 970 680 42.6 1,000 (3.0) 2,510 3,030 20.7
PAT 16,240 12,670 28.2 14,410 12.7 34,600 49,410 42.8
Source: Company

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Life insurance: Growth momentum maintained

 Life insurance sustained a fairly good quarter with individual WRP registering >49% YoY
growth, leading to similar growth in new business premium (up > 46% YoY at INR8.3bn).

 Life insurance business reported PAT of INR970n (INR1bn in Q2FY18, INR3bn in FY17
and INR2.5bn in FY16).
 Solvency ratio came in at 308% (steady QoQ and regulatory requirement of 150%).

Table 3: Kotak Life Insurance—Key metrics

(INR mn) Q3FY18 Q3FY17 Growth (%) Q2FY18 Growth (%) FY16 FY17 Growth (%)
New Business premium 8,310 5,670 46.6 6,870 21.0 22,100 28,500 29.0
Profit (INR mn) 970 680 42.6 1,000 (3.0) 2,510 3,030 20.7
Source: Company

Kotak Mahindra Prime: Sustaining growth momentum

 The quarter was characterised by strong >15% YoY growth in overall car financing
portfolio (to ~INR200bn). This, along with strong growth in capital market related
lending in Q3FY18, led to overall customer asset growth of >27% YoY. Management
expects growth to gain traction given a few new initiatives (launched consumer durable
financing business through KMP).
 Asset quality was steady with NNPLs at 40bps (41bps in Q2FY18).

Table 4: Kotak Mahindra Prime – Key metrics

(INR mn) Q3FY18 Q3FY17 Growth (%) Q2FY18 Growth (%) FY16 FY17 Growth (%)
PBT 2,260 2,030 11.3 2,290 (1.3) 7,720 7,870 1.9
PAT 1,480 1,330 11.3 1,500 (1.3) 5,020 5,160 2.8
Auto advances 199,680 173,100 15.4 198,310 0.7 167,070 181,780 8.8
Source: Company

Kotak Securities: Strong profitability growth

 Average daily trading volumes (ADTV) came in at INR150bn (up >70% YoY/20% QoQ),
leading to market share rising to 2.0% (1.9% in Q2FY18).
 Revenue and PAT came in at INR4.52bn (up >55% YoY) and INR1.5bn (up >80% YoY),
respectively.

Table 5: Kotak Securities—Key metrics

(INR mn) Q3FY18 Q3FY17 Growth (%) Q2FY18 Growth (%) FY16 FY17 Growth (%)
Revenues 4,520 2,870 57.5 3,510 28.8 9,730 11,850 21.8
PBT 2,310 1,250 84.8 1,770 30.5 3,800 5,430 42.9
PAT 1,540 850 81.2 1,180 30.5 2,510 3,620 44.2
PAT margin (%) 34.1 29.6 33.6 25.8 30.5
Avg daily volumes (INR bn) 150 87 71.9 124 21.1 73 90 22.6
Branches 1,305 1,300 0.4 1,454 (10.2) 1,209 1,281 6.0
Source: Company

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Asset management: AUM growth momentum sustained
 AUM growth extended traction, growing >45% YoY. AUMs crossed the ~INR1.2tn mark
with equity AUMs at INR447bn (up >20% QoQ).

 Consequently, profitability also improved with PBT at INR570mn and PAT at INR380mn
(INR230mn in Q2FY18 and INR550mn in FY17).

Table 6: Domestic asset management business—Key metrics

(INR mn) Q3FY18 Q3FY17 Growth (%) Q2FY18 Growth (%) FY16 FY17 Growth (%)
PBT 570 240 137.5 340 67.6 900 840 (6.7)
PAT 380 160 137.5 230 65.2 730 550 (24.7)
AUMs 1,199,960 823,670 45.7 1,108,320 8.3 587,310 924,400 57.4
Source: Company

Investment banking: A strong quarter, but volatility persist

 Kotak Mahindra Capital Company (KMCC), the investment banking division, reported
PAT of INR360mn (versus loss in Q2FY18, INR460mn in FY17 and INR320mn in FY16).

 While the division has several mandates in the pipeline (ECM and advisory), it remains
to be seen how much it will contribute to bottom line.

Table 7: Kotak Mahindra Capital Company—Key metrics

(INR mn) Q3FY18 Q3FY17 Growth (%) Q2FY18 Growth (%) FY16 FY17 Growth (%)
Total income 760 260 192.3 150 406.7 1,140 1,360 19.3
PBT 540 90 500.0 (20) NA 460 610 32.6
PAT 360 70 414.3 (10) NA 320 460 43.8
Source: Company

Table 8: SoTP valuation (FY20E)

AUMs / Value per
Multiple Value of business Kotak Bank's Value
Method earnings / share
(x) (INR mn) holding (INR mn)
book (INR)
Bank PABV 4,54,440 3.9 17,72,315 100 17,72,315 931
Prime PABV 61,571 3.0 1,97,026 100 1,97,026 104
Life insurance Appraisal value 78,647 100 78,647 41
Securities / Invt banking PE 9,162 20.0 1,83,247 100 1,83,247 96
MF/Offshore AUMs/PE % of AUM 24,64,357 5.2 1,28,261 100 1,28,261 67
Total 23,59,496 23,59,496 1,240
Source: Edelweiss research

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Financial snapshot (INR mn)

Year to March Q3FY18 Q3FY17 % change Q2FY18 % change YTD FY18 FY18E FY19E
Interest income 63,907 56,661 12.8 60,729 5.2 1,83,987 277,384 327,563
Interest exp 32,048 29,190 9.8 29,876 7.3 91,230 155,399 182,277
Net int. inc. (INR mn) 31,859 27,471 16.0 30,853 3.3 92,757 121,985 145,286
Non interest income 25,814 11,962 115.8 21,048 22.6 66,414 60,503 69,690
Net revenues 57,673 39,432 46.3 51,901 11.1 159,171 182,488 214,976
Non interest expenses 31,989 19,144 67.1 28,375 12.7 88,399 81,671 91,608
Pre-provision profit 25,684 20,288 26.6 23,526 9.2 70,771 100,817 123,368
Provisions 2,263 2,178 3.9 2,529 (10.5) 7,114 10,344 11,383
Profit before tax 23,421 18,110 29.3 20,997 11.5 63,658 90,473 111,985
Tax 7,959 6,115 30.2 7,113 11.9 21,710 29,734 36,769
Core profit 15,462 11,995 28.9 13,884 11.4 41,948 60,739 75,216
Minorities/affiliates (190) (10) NA (479) NA (834) (1,150) (1,000)
PAT 15,271 11,985 27.4 13,406 13.9 41,114 59,589 74,216

Ratios
NII/GII (%) 49.9 48.5 50.8 50.4 44.0 44.4
Cost/income (%) 55.5 48.5 54.7 55.5 44.8 42.6
Provisions / PPOP 8.8 10.7 10.7 10.1 10.3 9.2
Tax rate (%) 34.0 33.8 33.9 34.1 32.9 32.8

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Key highlights of Q3FY18 concall takeaways

With respect to Operating metrics

 For the quarter was loan growth was pegged at >23% YoY, across various area. The
bank highlighted that credit cycle is now getting comfortable and is more confident of
sustaining the growth

o With respect to SMEs, there has not been any significant increase in revenue or
working capital requirement. On the contrary the bank highlighted there have
been instances that SMEs (especially trader segment) are still grappling with GST
implementation and thus do not see this as a major growth area as of now.
o Had a good monsoon, which is reflected in rural India showing good signs of
growth (reflected in tractor sales and CV sales).

 CASA deposit now standing at > 46%. The bank continue to see strong SA growth (60%
YoY growth on daily average basis). The bank highlighted that on the CASA journey,
they are among the few bank that offer higher rates and the delta growth has been
very impressive. The bank thus expects that growth in the saving balances will likely
continue
 For 9mFY18 there was domestic surplus liquidity and that led to competitive pressure
on lending and consequently on yields and NIMs. Having said that the liquidity in the
system has come downward and this is where the things start to turn around and the
benefit of low cost deposit start to play through. The bank is thus not duly worried on
the NIMs.
o On the other hand there is also a cost of associated with higher LCR ratio that bank
has to maintain ( starting Jan 2018, LCR requirement is 90%) which has also started
to have a bearing on NIMs.

 Significant growth in subsidiaries namely securities, IB, asset management and life
insurance business – actual growth in earnings of non-financing business is 80%. Bank
still owns 100% of these businesses
 Expect cost/income ratio to steadily increase, having said that if bank sees some
investment opportunity for future they will not restrain just based on cost/income ratio.

With respect to asset quality metrics

 On a path to resolving, recovering existing stock of stress book – flow of problematic
assets seems to be much under control

 SMA-2 at INR3.08bn (0.19% of advances) versus INR2.5bn (0.16% of advances) in

previous quarter.

With respect to digital banking updates:

 Engine of customer acquisition going on smoothly – during the launch of 811 scheme, it
has highlighted that would want to double number of customers to 16 mn within a
period of 18 months & is very well on path to achieve this journey

 Three new initiatives during the quarter

o Biometric Authentication for Mobile Banking App login

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o Instant online remittance thru Forex Portal ‘Kotak Remit’

o Online shopping made easy: Can opt for no OTP for < `2,000
 Within the customers acquired through 811 : a) 91% is within 18-40 years ( far more
digital savvy customers and can be leveraged) b) 45% are salaried and c) 63% are
from top 20 cities

Other highlights

 The capital market business saw a good growth,

1. The Kotak securities saw the best quarter profitability given higher volume and
market share gains .

2. Investment bank had a very active quarter, saw good profitability metrics.
 The bank continues to spend on 811 and that is reflected in cost metrics.

 Weighted average cost of SA is 5.58% (with institutional part)

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Key highlights of Q2FY18 concall takeaways

With respect to growth

 Management believes that recpitalisation is like a steroid for the economy and would
potentially kick start economic reform process. PSU Banks will be able to take the
bolder steps even if this means to take higher haircut (as now they will have ability
and capital to do so). This will also open more opportunity for distress asset as well.
 For the quarter was pegged at >20% YoY, across various area. The bank continues to
maintain the growth guidance of 20% plus for FY18 ( even accounting for the
announcement yesterday).
o Corporate segment grew > 26% growth (largely gaining market share). This is due
to both deepening of presence in high quality corporate and new customer
acquisition in mid-corporate segment. The bank continues to remain confident of
clocking 20-25% growth.

o Agri, home loan/LAP and unsecured portfolio (business loans/PL/CCs) witnessed

sharp momentum this quarter. The management believes that consumption story
will continue.
o CV/CE saw a very good growth during the quarter – up >33% YoY (all segment of
CVs has seen growth expect for small CV portfolio).
 CASA deposit now standing. SA has registered a strong 60% growth, this has some
element of lumpy government business. The core saving growth ( ex-government
savings) is still > 40%.
 Opex during the quarter was relatively higher (albeit lower sequentially) due to a) the
marketing and advertising expenses related to 811 scheme and b) acquisition of some
PSLCs.

 This is the first year wherein the bank sees first time the revenue synergies has started
to play out, having said that banks still believe there is some more way to go.

 The bank sees the challenges continuing in SME space and which is why the bank is
growing cautiously in this segment (reflected in softer business banking growth).

With respect of asset quality

 The bank has nothing to report on divergence, based on t he RBI review for FY17.
 In terms of accounts under NCLT: The bank had exposure to 4 accounts (from eIVBL
book) in first list. In terms of the second list, the exposure are relatively small and
bank highlighted that they are very adequately provided for.
 Credit cost in line with guidance. The bank see it at levels of trending down from FY17
levels of 61bps. The bank maintained the same guidance.

 SMA-2 at INR2.5bn (0.16% of advances) , versus INR3.05bn in previous quarter.

 There was no sale to ARC during the quarter. The bank doesn’t believe in selling for SRs,
bank will sell only on cash basis if any.

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With respect to digital banking updates:

 Traction in 811 is going strong: ~10.5 mn customers.

 Within the customers acquired through 811 : a) 91% is within 18-35 years ( far more
digital savvy customers and can be leveraged) b) 45% are salaried and c) 63% are
from top 20 cities
 Monthly transactions on mobile more than doubled.

 Digital contribution in overall sourcing one of the highest in the Industry

o ~77% - Recurring Deposit sourced digitally

o ~60% - Term Deposit sourced digitally

o ~29% of the Salaried Personal Loan is through digital share

Other highlights

 There were some interest income reversal on agri. portfolio which has impacted the
NIMs during the quarter. The bank maintained the NIMs guidance of 4.25% (which bank
feels is more sustainable level). The bank is seeing yield pressure on higher quality
corporate (substitution effect playing through), having said that the bank will focus on
quality business and will continue to look at risk adjusted margins.
 The company now own 100% of the life insurance business. It acquired 26% stake in life
insurance business for INR12.93bn. The bank has concluded acquisition of BSS
Microfinance.
 As of now the fixed rate book is 30% and of the balance 70% (floating book), the bank
has MCLR linked loans at 70%.

 The banks believe that under IFRS the banks net-worth would be higher than current
reported net-wroth.

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Company Description
KMB is India’s leading full services financial conglomerate, dominating the securities and
investment banking space. It is currently focused on growing its banking, asset
management, and insurance businesses. It began operations in 1986 as a bill discounting
and leasing NBFC under Kotak Mahindra Finance and converted itself into a bank in 2003.
The group has a widespread presence across 1375 branches. The group has a decent
platform to cross-sell its products, given its presence in the financial spectrum. Kotak
Securities has 2.0% market share in overall market volumes and is one of the prominent
domestic investment bankers. It is developing its presence in the asset management and
insurance businesses, where it has 2-4% market share

Investment Theme
KMB has put in credible efforts to lay a strong foundation—liability franchise, digitisation,
capital position and limited stress hit—for a scalable and profitable model. 9mFY18
performance reflects synergy benefits playing through on cost as well as revenue fronts.
With significant benefits likely to flow from formalisation of financial savings, subsidiaries
could see strong business tailwinds.

Key Risks
Continued stress in the economy and hence the CV/CE portfolio can moderate the growth
prospects of the bank.

Depressed capital markets can impact the profitability of investment banking and securities
business.

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Financial Statements (Banking merged entity)

Income statement (INRmn) Balance sheet (INRmn)
Year to March FY17 FY18E FY19E FY20E As on 31st March FY17 FY18E FY19E FY20E
Net Interest income 83,070 100,298 121,063 144,265 Liabilities
Non interest income 32,794 35,904 41,006 47,015 Equity capital 9,205 9,515 9,515 9,515
Net revenues 115,863 136,203 162,069 191,279 Reserves 251,979 348,348 397,762 459,076
Operating expense 56,248 62,822 70,374 78,862 Net worth 261,184 357,862 407,277 468,591
Preprovision profit 59,615 73,380 91,694 112,417 Sub bonds/pref cap 501 501 501 501
Provisions 8,102 9,218 10,097 11,638 Deposits 1,574,258 1,900,419 2,325,715 2,870,844
PBT 51,513 64,163 81,598 100,779 Borrowings 262,916 295,016 349,790 412,329
Taxes 17,397 21,672 27,566 34,047 Other liabilities 62,990 73,799 85,162 98,513
PAT 34,116 42,491 54,032 66,732 Total 2,161,849 2,627,598 3,168,444 3,850,778
Assets
Ratios (%) Loans 1,360,836 1,658,509 2,017,946 2,470,965
Year to March FY17 FY18E FY19E FY20E Investments 611,274 754,096 914,517 1,117,464
ROA decomposition (%) Gilts 412,951 519,806 633,981 779,815
Net Int. Inc./Assets 4.2 4.3 4.3 4.2 Others 198,324 234,291 280,536 337,649
Fees/Assets 1.5 1.4 1.4 1.3 Cash & equi 143,300 162,511 176,514 193,903
Inv. profits/Assets 0.2 0.1 0.1 0.1 Fixed Assets 15,289 14,603 13,760 12,761
Net revenues/Assets 5.8 5.8 5.7 5.6 Other Assets 31,149 37,879 45,706 55,684
Operating Exp./Assets (2.8) (2.7) (2.5) (2.3) Total 2,161,849 2,627,598 3,168,444 3,850,778
Provisions/Assets (0.4) (0.4) (0.4) (0.3) Valuation Metrics (INR)
Taxes/Assets (0.9) (0.9) (1.0) (1.0) Year to March FY17 FY18E FY19E FY20E
Total Costs/Assets (4.1) (4.0) (3.8) (3.6) EPS 18.5 22.3 28.4 35.1
ROA 1.7 1.8 1.9 1.9 EPS growth (%) 62.7 20.5 27.2 23.5
Equity/Assets 12.3 13.2 13.5 12.7 Book value per share 141.9 188.0 214.0 246.2
ROAE 13.9 13.7 14.1 15.2 Adjusted BV/share 137.3 182.2 208.2 240.4

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Financial Statements
Key Assumptions Income statement (INR mn)
Year to March FY17 FY18E FY19E FY20E Year to March FY17 FY18E FY19E FY20E
Macro Interest income 241,187 277,384 327,563 388,804
GDP(Y-o-Y %) 6.6 6.5 7.1 7.6 Interest expended 139,268 155,399 182,277 216,866
Inflation (Avg) 4.5 3.8 4.5 5.0 Net interest income 101,919 121,985 145,286 171,938
Repo rate (exit rate) 6.3 6.0 6.0 6.5 Non interest income 52,133 60,503 69,690 80,012
USD/INR (Avg) 67.1 64.5 65.0 66.0 - Fee & forex income 37,673 46,081 54,211 63,334
Sector - Misc. income 14,371 14,332 15,388 16,588
Credit growth 9.0 12.0 14.0 17.0 - Investment profits 90 90 90 90
Deposit growth 14.0 12.0 13.0 14.0 Net revenue 154,052 182,488 214,976 251,950
CRR 4.0 4.0 4.0 4.0 Operating expense 73,075 81,671 91,608 102,745
SLR 20.0 20.0 19.5 19.0 - Employee exp 33,655 37,360 41,580 46,222
G-sec yield 6.5 6.5 7.0 7.1 - Other opex 39,420 44,311 50,028 56,522
Company Preprovision profit 80,977 100,817 123,368 149,206
Yield on advances 11.8 11.5 11.3 11.0 Provisions 9,299 10,344 11,383 13,105
Cost of funds 6.3 6.1 6.0 5.9 Profit Before Tax 71,677 90,473 111,985 136,101
Bnkg business assump. Less: Provision for Tax 23,670 29,734 36,769 44,708
Credit growth 14.7 21.7 21.5 22.3 Profit After Tax 46,707 59,589 74,216 90,393
Deposit growth 13.5 20.7 22.4 23.4 Adj. Diluted EPS (INR) 25.4 31.3 39.0 47.5
CASA 44.0 44.8 45.6 46.2 Dividend per share (DPS) 3.4 4.1 5.2 6.4
Slippages 1.3 1.3 1.3 1.3 Dividend Payout Ratio(%) 7.1 7.0 7.1 7.2
Securities bus. Assump.
Avg Daily Trading Vol. 89,834 126,939 147,142 170,104 Growth ratios (%)
Commission yields 2.0 2.0 2.0 2.0 Year to March FY17 FY18E FY19E FY20E
PMS AUMs 95,407 114,488 137,386 164,863 NII growth 20.0 19.7 19.1 18.3
IB assumption Fees growth 19.6 22.3 17.6 16.8
Fin adv. & transact. fee 1,176 1,552 1,783 2,006 Opex growth 5.1 11.8 12.2 12.2
Operating margin 42.6 47.5 53.8 54.3 PPP growth 37.4 24.5 22.4 20.9
Kotak Prime assumption Provisions growth (5.2) 11.2 10.0 15.1
Advance growth 13.0 14.8 14.8 14.8 Adjusted Profit 44.5 27.6 24.5 21.8
Yield on advances 12.5 12.2 11.9 11.8
Cost of funds 8.5 8.4 8.3 8.1 Balance sheet (INR mn)
Gross NPLs 1.4 1.5 1.6 1.6 As on 31st March FY17 FY18E FY19E FY20E
Kotak AMC Share capital 9,205 9,515 9,515 9,515
AUM growth 41.0 63.0 25.0 20.0 Reserves & Surplus 346,202 457,790 524,795 606,578
Management fees 0.3 0.3 0.3 0.3 Net worth 355,407 467,304 534,310 616,092
Deposits 1,574,258 1,900,419 2,325,715 2,870,844
Total Borrowings 619,712 698,554 805,847 928,751
Other liabilities 3,285 3,826 4,474 5,253
Total liabilities 2,552,662 3,070,103 3,670,346 4,420,940
Loans 1,390,375 1,692,483 2,057,088 2,516,128
Investments 622,843 765,844 926,452 1,129,595
Cash and Equivalents 183,556 203,389 218,071 236,202
Fixed assets 15,954 15,234 14,349 13,301
Other Assets 339,933 393,153 454,385 525,715
Total assets 2,552,662 3,070,103 3,670,346 4,420,940

12 Edelweiss Securities Limited

 Kotak Mahindra Bank
RoE decomposition (%) Valuation parameters
Year to March FY17 FY18E FY19E FY20E Year to March FY17 FY18E FY19E FY20E
Net int. income/assets 4.2 4.4 4.3 4.3 Adj. Diluted EPS (INR) 25.4 31.3 39.0 47.5
Fees/Assets 2.1 2.2 2.1 2.0 Y-o-Y growth (%) 44.0 23.4 24.5 21.8
Net revenues/assets 6.3 6.5 6.4 6.2 BV per share (INR) 193.1 245.6 280.8 323.8
Operating expense/assets 3.0 2.9 2.7 2.5 Adj. BV per share (INR) 188.5 239.7 274.9 317.9
Provisions/assets 0.4 0.4 0.3 0.3 Diluted P/E (x) 41.8 33.9 27.2 22.3
Taxes/assets 1.0 1.1 1.1 1.1 Price/ Adj. BV (x) 5.6 4.4 3.9 3.3
Total costs/assets 4.3 4.4 4.2 4.0 Dividend Yield (%) 0.3 0.4 0.5 0.6
ROA 2.0 2.2 2.2 2.3 Price/Earnings (x)* 40.6 32.8 26.2 21.5
Equity/assets 13.7 14.7 14.9 14.3 Price/ BV (x)* 5.3 4.2 3.6 3.1
ROAE (%) 14.4 14.8 15.0 15.9 *adjusted for insurance

Peer comparison valuation

Market cap Diluted P/E (X) Price/ Adj. BV (X) ROAE (%)
Name (USD mn) FY18E FY19E FY18E FY19E FY18E FY19E
Kotak Mahindra Bank 31,635 32.8 26.2 4.4 3.9 14.8 15.0
Axis Bank 23,701 33.7 17.1 2.4 2.2 7.3 12.2
DCB Bank 914 23.1 17.8 2.4 2.1 11.1 11.9
Federal Bank 3,177 19.2 14.6 1.7 1.6 9.9 10.8
HDFC Bank 79,186 27.9 23.5 4.9 3.6 18.6 17.9
ICICI Bank 35,566 21.0 15.2 3.1 2.7 10.8 13.9
IndusInd Bank 15,817 27.6 22.2 4.4 3.7 16.5 17.7
Karnataka Bank 937 9.6 7.9 1.0 0.9 8.8 10.0
Yes Bank 12,577 18.9 14.2 3.3 2.8 17.8 20.3
Median - 23.1 17.1 3.1 2.7 11.1 13.9
AVERAGE - 23.9 17.8 3.1 2.6 12.8 14.4
Source: Edelweiss research

13 Edelweiss Securities Limited

 Banking and Financial Services

Additional Data
Directors Data
Dr. Shankar Acharya Non-Executive Chairman Uday Kotak Executive Vice Chairman & MD
Dipak Gupta Joint Managing Director C. Jayaram Director
Amit Desai Director Uday Chander Khanna Director
Prof. S. Mahendra Dev Director Farida Khambata Director
Mark Edwin Newman Director Prakash Apte Director

Auditors - S. R. Batliboi & Co. LLP

*as per last annual report

Holding - Top 10
Perc. Holding Perc. Holding
Capital Group Companies 10.43 Canada Pension Plan Investment Board 6.05
Commonwealth Bank of Australia 3.74 ING Mauritius Investments 1.72
Sumitomo Mitsui Financial Group 1.60 Massachusetts Mutual Life Insurance 1.55
SBI Funds Management 1.47 Caladium Investment 1.36
Matthews International Capital Management 1.29 Standard Life Aberdeen 1.21
*as per last available data

Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
29 Mar 2017 Mahindra Family Trust I Buy 740590 860.00
29 Mar 2017 Anand Mahindra Family Trust Sell 740590 860.00
29 Mar 2017 Mahindra Family Trust Ii Buy 1584990 860.00
29 Mar 2017 Anuradha Mahindra Family Trust Sell 1584990 860.00
08 Mar 2017 Caisse De Depot Et Placement Du Quebec Buy 18400000 817.00
08 Mar 2017 Canada Pension Plan Investment Board Buy 9200000 817.00
08 Mar 2017 KEDAR S. MANKEKAR Buy 150000 825.00
08 Mar 2017 MANKEKAR LAXMI SHIVANAND Buy 358820 825.00
08 Mar 2017 OM KEDAR INVESTMENTS Sell 508820 825.00
08 Mar 2017 Uday Suresh Kotak Sell 27600000 817.00

*in last one year

Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
07 Apr 2017 ANUPAMA ACHIA Sell 16000.00
07 Apr 2017 Prasad Jagajit Mangal Sell 40000.00
06 Apr 2017 Prasad Jagajit Mangal Sell 40000.00
27 Mar 2017 Mahesh Dayani Sell 150000.00
24 Mar 2017 Ashok Baswa Rao Sell 20000.00
*in last one year

14 Edelweiss Securities Limited

 RATING & INTERPRETATION

Company Absolute Relative Relative Company Absolute Relative Relative

reco reco risk reco reco Risk

Allahabad Bank HOLD SU M Axis Bank HOLD SP M

Bajaj Finserv HOLD SP L Bank of Baroda BUY SP M
Bharat Financial Inclusion BUY SO M Capital First BUY SO M
DCB Bank HOLD SP M Dewan Housing Finance BUY SO M
Equitas Holdings Ltd. BUY SO M Federal Bank BUY SP L
HDFC HOLD SP L HDFC Bank BUY SO L
ICICI Bank BUY SO L IDFC Bank HOLD SP L
Indiabulls Housing Finance BUY SP M IndusInd Bank BUY SP L
Karnataka Bank BUY SP M Kotak Mahindra Bank HOLD SP M
L&T FINANCE HOLDINGS LTD BUY SO M LIC Housing Finance BUY SP M
Magma Fincorp BUY SP M Mahindra & Mahindra Financial Services HOLD SP M
Manappuram General Finance BUY SO H Max Financial Services BUY SO L
Multi Commodity Exchange of India BUY SP M Muthoot Finance BUY SO M
Oriental Bank Of Commerce HOLD SP L Power Finance Corp BUY SO M
Punjab National Bank BUY SP M Reliance Capital BUY SP M
Repco Home Finance BUY SO M Rural Electrification Corporation BUY SO M
Shriram City Union Finance BUY SO M Shriram Transport Finance BUY SO L
South Indian Bank BUY SP M State Bank of India BUY SP L
Union Bank Of India HOLD SP M Yes Bank BUY SO M

ABSOLUTE RATING
Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe
within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return

15 Edelweiss Securities Limited

 Banking and Financial Services

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com

ADITYA
Digitally signed by ADITYA NARAIN
DN: c=IN, o=EDELWEISS SECURITIES LIMITED,
Aditya Narain ou=HEAD RESEARCH, cn=ADITYA NARAIN,
serialNumber=e0576796072ad1a3266c27990
f20bf0213f69235fc3f1bcd0fa1c30092792c20,
Head of Research
NARAIN
postalCode=400005,
2.5.4.20=3dc92af943d52d778c99d69c48a8e0
c89e548e5001b4f8141cf423fd58c07b02,
aditya.narain@edelweissfin.com st=Maharashtra
Date: 2018.01.19 22:35:49 +05'30'

Coverage group(s) of stocks by primary analyst(s): Banking and Financial Services

Allahabad Bank, Axis Bank, Bharat Financial Inclusion, Bajaj Finserv, Bank of Baroda, Capital First, DCB Bank, Dewan Housing Finance, Equitas Holdings
Ltd., Federal Bank, HDFC, HDFC Bank, ICICI Bank, IDFC Bank, Indiabulls Housing Finance, IndusInd Bank, Karnataka Bank, Kotak Mahindra Bank, LIC
Housing Finance, L&T FINANCE HOLDINGS LTD, Max Financial Services, Multi Commodity Exchange of India, Manappuram General Finance, Magma
Fincorp, Mahindra & Mahindra Financial Services, Muthoot Finance, Oriental Bank Of Commerce, Punjab National Bank, Power Finance Corp, Reliance
Capital, Rural Electrification Corporation, Repco Home Finance, State Bank of India, Shriram City Union Finance, Shriram Transport Finance, South Indian
Bank, Union Bank Of India, Yes Bank
Recent Research

Date Company Title Price (INR) Recos

19-Jan-18 HDFC Bank All round strong performance; 1,952 Buy

Result Update
18-Jan-18 Yes Bank On accelerated path to 341 Buy
achieve Vision 2020;
Result Update
18-Jan-18 DCB Bank Productivity improvement 184 Hold
holds key;
Result Update

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe Rating Interpretation

Buy Hold Reduce Total Rating Expected to

Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period
* 1stocks under review
Hold appreciate up to 15% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn
743
Reduce depreciate more than 5% over a 12-month period
Market Cap (INR) 156 62 11
594

One year price chart

446
(INR)

1,200
297
1,080

149 960
(INR)

- 840
Apr-14

Sep-14
Feb-14

Mar-14

Jun-14

Dec-14
Jul-14

Aug-14

Oct-14

Nov-14
May-14
Jan-14

720

600
Dec-17
Aug-17

Oct-17
Apr-17

May-17

Nov-17
Jan-17

Jan-18
Feb-17

Sep-17
Jun-17
Mar-17

Jul-17

Kotak mahindra Bank

16 Edelweiss Securities Limited

 Kotak Mahindra Bank
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Banking and Financial Services

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 Kotak Mahindra Bank

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