Kotak Mahindra Bank Ltd's Q3FY14 results were below expectations. Profit before tax (Rs 890 crore) grew modestly (6%y-o-y) despite a Rs 110-crore increase in net NPA.
Revenues were weak in the lending businesses as KMB maintained a cautious stance. Credit stress spiked as a lumpy mid-corporate account turned into an NPA.
Operating costs were well controlled. Non-lending businesses showed an uptick in performance. The management is confident of an improving trajectory — both on credit quality and loan growth. We lower our estimates, building in lower growth and higher credit costs. We roll forward valuations by a quarter. Our updated price target is R763. Maintain overweight.
NII growth in the bank as well the auto finance business (KMP) was weak (11% y-o-y; -1%q-o-q) as Kotak maintained its cautious credit stance (loans grew 6% y-o-y). Only small business & personal loans (39% y-o-y) and agri (23% y-o-y) segments saw strong growth. Growth in all other segments was below 15% y-o-y. The CV/CE book shrank 26% y-o-y. Fee growth in these businesses was also muted.
Credit quality stress (net NPAs up R110 crore q-o-q) was primarily due to a large mid-corporate account (R70 crore) in the real estate sector turning NPA. Operating costs were tightly controlled, particularly in the non-lending businesses. Cost growth in the bank moderated (13% y-o-y), but the pace of branch expansion remained steady (31 branches added in 3QFY14; 25 branches per quarter have been added in the past eight quarters).