YES Securities' research report on Kotak Mahindra Bank
We raise FY21/22 earnings and ABV estimates by 10-12% and 2.5-3% respectively on the back of material upgrade in PPOP expectations (higher NII and lower cost growth now) and significant reduction in credit cost assumption. The latter being underpinned by low impeding and susceptible flow (small SC-order slippage pool and SMA-2 + robust customer asset mix with only 6% coming from unsecured products) and management commentary on current Covid buffer (62 bps of adv.) being adequate to address potential stress. We estimate the stand-alone bank to deliver 20-22% earnings CAGR on a 6-7% loan CAGR over FY20-22 because of expansion in core PPOP margin.
Outlook
We see no deterioration in RoA for the current year despite higher provisions and expect profitability to improve to life-time high in FY22. KMB has underperformed in recent months and its valuation premium to HDFCB has dissipated. Expect valuation to re-rate from current 3x FY22 P/ABV is response to likely continuation of non-linear earnings growth. Upgrade rating to BUY and 12m PT to Rs1,670.
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