Home >Markets >Stock Markets >HDFC Securities gives 'Reduce' rating to Kotak Mahindra Bank share

Kotak Mahindra Bank's 3Q operating performance was in line with estimates, and was backed by a QoQ revival in credit growth and sustained CASA traction. HDFC Securities has given 'Reduce' rating to the bank's share. Current market price of Kotak Mahindra Bank's share is 1,727 on NSE. Target price set by the brokerage is 1,717. "Current lofty valuations fully price in (1) an imminent pick-up in loan growth momentum, (2) strong CASA traction and resulting CoF tailwinds, and (3) a gradual return to the pre-COVID-19 credit cost trajectory post FY21E." Here are the report highlights:

> Pro forma stress rises: Like several banks this quarter, KMB witnessed a rise in pro forma GNPAs to ~3.3% (vs. ~2.7% QoQ), implying pro forma slippages of ~ 20bn (3.8% ann.). Retail unsecured loans disproportionately contributed to a majority of incremental stress (~45% of slippages vs. ~6% of loans).

"We continue to conservatively build GNPAs of ~4.0% in FY21E as we expect SME and unsecured retail loans to contribute to incremental stress as suggested by commentary and significant disbursals under the ECLGS," says the brokerage.

> Lower-than-expected provisions: Overall non-tax provisions rose 34.9/62.5% to ~ 6bn, albeit ~11.3% below our estimates. Adjusted for interest reversals on pro forma slippages, credit costs would’ve been ~30bps lower at 86bps.

The bank held COVID-19 provisions of ~60bps of loans (flat QoQ). "We continue to conservatively build LLPs of 1.0% over FY21-23E," says the

> Growth revives, sequentially: While outstanding loans dipped 1.2% YoY, they witnessed a QoQ growth of 4.5%, led by corporate (+5.8%), mortgages (+4.7%) and agri (+5.9%) segments. Commentary suggests that KMB continues to log sustained improvement in monthly business volumes, which are nearing pre-COVID-19 levels across several businesses. We continue to factor in a sharp uptick in loan growth to ~13.6% over FY22-23E.

> CASA engine continues to fire: Aggregate deposits grew 10.8/1.7%, while CASA balances grew at nearly double the rate (+21.5/4.5%). Consequently, the CASA ratio rose, yet again, to an all time high of ~58.9% (+517/173bps).

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