Can Kotak be a good banking bet in rising rate environment?

While some analysts did cut their target on the stock, assigning it a lower price to book multiple, their price targets suggest up to 23 per cent potential return in the next 12 months over Wednesday’s closing of Rs 1,776.65.

“Kotak delivered a healthy core operating performance and broad-based loan growth. NIM inched up further sequentially and is at the higher end of the range in recent years. The bank continues to demonstrate steady progress in building a strong liability franchise, with CASA ratio standing at 61 per cent, highest in the industry. This positions it favorably in a rising rate environment and will enable it to grow competitively in its chosen business segments,” said Motilal Oswal Securities.

The bank reported a 65 per cent year-on-year (YoY) rise in standalone net profit at Rs 2,767 crore in the March quarter on 18 per cent YoY rise in Net Interest Income (NII) at Rs 4,521 crore. Net Interest Margin (NIM) for the quarter came in at 4.78 per cent against 4.39 per cent in the year ago quarter.

The management stated that there could be a contraction of 10-15 basis points in NIM, presumably from the elevated quarterly level of 4.78 per cent. It also stated that 4.78 per cent is an “exceptional” margin and a margin of 4.3-4.6 per cent would be regarded as healthy

YES Securities said that there are many factors supporting Kotak’s NIM including the fact that Kotak could ratchet up saving account (SA) growth.

“Additionally, unsecured retail is a small proportion of the overall loan book and its share should rise. Also, the fixed rate loan book is a relatively small part of the overall loan book. At the same time, despite a loan growth of 21 per cent YoY, capital adequacy has inched up on YoY basis. The bank sees this as an opportunity to enhance market share, while adhering to risk-adjusted pricing,” it noted. This brokerage has a target of Rs 2,023.

Nirmal Bang Institutional Equities, which has a target of Rs 2,134 on the stock said while it may seem that the record margins came on the back of maxing out the credit-deposit ratio, the bank is still sitting on average liquidity coverage ratio of 130 per cent.

“Further, there is good scope for increasing high-margin unsecured exposure. Opex growth (YoY) indicates strong customer acquisition (nearly doubled in Q4). Mortgages and unsecured consumer loans saw strong traction. Asset quality continued to improve with credit cost coming off YoY and NPA ratios declining further QoQ. SMA numbers seem under control, indicating positive asset quality outlook,” it said.

Motilal Oswal sees the bank delivering a 15 per cent earnings CAGR over FY22-24. It has maintained a ‘neutral’ rating with a target of Rs 2,000 per share.

Meanwhile, Kotak Mahindra Bank has rejigged its board, with Gaurang Shah (ED) being moved out of the bank and elevated as Chairman of Kotak General Insurance. KVS Manian (age 60 year) has been re-appointed as ED, while consumer banking head Shanti Ekambaram (59 yrs) has been elevated as ED.

This :We believe hints at a potential top management change, including MD & CEO Uday Kotak and DMD Dipak Gupta in December 2023,” said Emkay Global.

“We revise our earnings estimates for FY23 by 4 per cent but largely retain FY24 estimates. We expect the bank to deliver 2-2.1 per cent RoA, but RoE would remain moderate at 13-14 per cent due to its elevated capital levels. Factoring in higher CoE and moderate sustainable RoE of 14 per cent, we lower our target to Rs2,180 against Rs2,300 based on standalone P/ABV of 3.5 times vs. earlier 4 times,” it said.

Edelweiss has also cut its target to Rs 2,120 from Rs 2,540, even as it upgraded EPS by 7 per cent for FY23E; flat for FY24E. It reiterated its ‘BUY’ following Kotak’s best-in-class performance in Q4, and solid asset quality and LCR, “which make it well-poised for a rising rate cycle.”

Nirmal Bang said that while the management had sounded positive on loan growth, calibrated growth in deposits would be a key monitorable, along with how the bank approaches its liability pricing strategy.