Kotak Mahindra Bank Rs 685

India Equity Institutional Research BANKS RESULT UPDATE Kotak Mahindra Bank Rs 685 Smooth merger; benefits to accrue HOLD KMB s consolidated PAT for Q4FY15 stood at INR 9.5 that primarily on the back of decent loan traction, (8% q/q), margins expansion (10 bp q/q) and healthy performance of subsidiaries. However, fee income performance remained tepid and operating expenses and credit costs stood higher. While the ING Vysya Bank merger is progressing smoothly, the unification should be complete by FY16-end. KMB has already engaged in retail product distribution through the ING branches. The synergy benefits in terms of cost savings and income should soon accrue. Persistent performance Steady loans, CASA improves, margins expand: NII grew 61.6% Y-o-Y & 5.0% Q-o-Q to INR 16.8 bn aided by 7.8% Q-o-Q loan book growth while margins surged 10 bps Q-o-Q. Low cost CASA mobilization during the quarter boosted margins expansion. Margins are expected to settle between 4.1-4.3% going forward. Non-interest income grew robustly by 32.0% Y-o-Y driven by core fee income at INR 4.6 bn and sizeable ARD buyout income of INR 650 mn. Operating expenses increased 61.9% Y-o-Y, but remained under control on Q-o-Q basis; the integration costs stood at INR 120 mn during Q2FY16. Moreover, the bank also incurred additional costs to the tune of INR 300 mn with respect to additional interest on savings account of eivbl to get it to 6%. While provisions on Y-o-Y basis stood staggering, sequentially they were down 42.2% boosting profit growth for the quarter. Consequently, standalone PAT increased 28.1% Y-o-Y to Rs 5.7 bn v/s INR 4.4 bn (Q2FY15). Most of the businesses reported decent growth with broking, investments and life insurance businesses stood strong during the quarter gone by. We expect the bank to deliver 21.3% CAGR in net earnings over FY16-FY18E driven by strong loan growth, steady NIMs and improving cost to income ratio. Target Price (Rs): 720 Potential upwnside:5% Market Data Shares outs (Mn) 1831 EquityCap(INR Mn) 9156 Mkt Cap (INR Mn) 1260899 52 Wk H/L (Mn) 744/532 Volume Avg(3m K) 1320.56 Face Value (INR) 5 Bloomberg Code KMB IN Market Info: SENSEX 26559 NIFTY 8051 Price Performance Tepid business growth: Loan book reported 8% q/q growth primarily driven by sturdy growth in corporate banking, business banking and home loans/lap business segments. Retail loan traction stood strong with most of the retails segments recording healthy growth. KMB management expects to clock robust 20% loan growth for current fiscal. Deposits, on the other hand, grew 5.5% q/q with traction emerging from CASA deposits. While the CA deposits grew 17% q/q, SA augmentation remained sedate with 7% q/q growth. The CASA ratio stood at 36% for the quarter. Asset quality slips: Asset quality slipped Y-o-Y with Gross NPA at 2.4% and net NPA at 1.1% during the quarter. The restructured loans (standard) stood at INR 4bn (0.4%) of which INR 2.6 bn emerged from e1vbl portfolio. Steady-state subsidiary performances: Healthy subsidiary profits have boosted the consolidated profits for KMB especially during the times of merger. Securities, Investment, Life Insurance and MF businesses have put up strong operating metrics and profitability. Moreover, going forward banking upon the synergy benefits, KMB should be in a position to boost its earnings further. Valuation & Recommendation: Barring Y-o-Y slip on asset quality, Q2FY16 earnings stood strong for the bank; both standalone and consolidated levels during the quarter. We believe 20%+ loan growth outlook, margin preservation, lower credit costs, cash recoveries from marked down acquired stressed assets pull and operating leverage on newly open branches will support earnings growth over FY15-FY17. We believe strong core capitalization, superior margins & asset quality, capital linked businesses revenues, improving liability franchise and synergy benefits accruing from ING Vysya Bank merger from Q1FY17 aiding banking business and strengthening market positioning are key value drivers for Kotak. Considering the synergy transition and incorporating the same into our financial estimates, we maintain HOLD rating with a target price of Rs 720 as per SOTP valuations (valuing the core bank at 3.4x FY17E P/ABV). Key Financials Standalone Particulars FY13 FY14 FY15 FY16E FY17E Net Interest Income 32,057 37,200 61,953 79,960 101,235 Pre-provision profits 21,566 25,771 42,315 56,483 72,815 Net Profit 13,607 15,025 24,834 33,567 42,881 EPS ( ) 18.3 19.8 24.1 24.5 23.5 BVPS ( ) 126.8 159.5 238.8 138.9 161.0 ABVPS ( ) 124.1 154.7 232.9 135.1 156.7 P/E (x) 37.4 34.6 28.4 27.9 29.2 P/ABV (x) 5.5 4.4 2.9 5.1 4.4 Shareholding pattern (%) Particulars Sep15 Jun15 Mar15 Promoters 33.77 33.86 40.02 FIIs 34.67 35.32 36.85 DIIs 4.22 3.69 1.86 Others 27.34 27.13 21.27 Total 100 100 100 Source: BSE Shweta Mane-Daptardar shweta.mane@krchoksey.com 91-22-6696 5555 ext. 526 www.krchoksey.com 91-22-6696 5203 91-22-6691 9574 KRChoksey Research is also available on Bloomberg KRCS<GO>, ThomsonReuters, Factset and Capital IQ November 02, 2015

Q2FY16: Result Analysis Income Statement Standalone (INR in mn) Q2FY16 Q1FY16 Q2FY15 Q-o-Q Y-o-Y Income Statement - Standalone Interest income 40,057 39,914 23,525 0.4% 70.3% Interest expense 23,269 23,932 13,136-2.8% 77.1% Net interest income 16,787 15,982 10,389 5.0% 61.6% Non interest income 6,157 5,924 4,665 3.9% 32.0% Total Net Income 22,945 21,906 15,054 4.7% 52.4% -- Employee costs 6,230 9,288 3,545-32.9% 75.7% -- Other operating expenses 6,267 6,649 4,172-5.7% 50.2% Operating expenses 12,497 15,937 7,717-21.6% 61.9% Pre-provision profits 10,448 5,970 7,336 75.0% 42.4% Provisions 1764 3053 537-42.2% 228.8% Profit before tax 8,684 2,917 6,800 197.7% 27.7% Tax expense 2,989 1,019 2,355 193.3% 26.9% Net profit 5,695 1,898 4,445 200.1% 28.1% Key balance sheet items & Asset quality - Standalone (INR in mn) Q4FY15 Q3FY15 Q4FY14 Y-o-Y Q-o-Q Networth 226,082 218,902 132,048 3.3% 71.2% Deposits 1,232,111 1,168,120 681,026 5.5% 80.9% Borrowings 218,727 214,353 105,540 2.0% 107.2% Advances 1,116,618 1,036,144 609,477 7.8% 83.2% GNPA ratio 2.4% 2.3% 1.9% 0.0 0.5 NNPA ratio 1.1% 1.0% 1.0% 0.0 0.1 Provision coverage ratio 56.0% 55.5% 47.5% 0.5 8.5 CASA ratio 36.0% 34.3% 31.1% 1.7 4.9 Reported NIM 4.3% 4.2% 5.0% 0.1-0.7 CAR 15.5% 16.4% 17.6% -0.9-2.1 Business segment wise profitability and consolidated PAT (INR in mn) Q1FY16 Q2FY15 Q2FY16 Kotak Mahindra Bank 1900 4450 5700 Kotak Life Insurance 660 520 480 Kotak AMC & TC 200-1 230 Kotak Securities 670 660 780 Kotak Mahindra Capital 30-70 70 Kotak Mahindra Prime 1190 1250 1270 Kotak Mahindra Investments 300 250 360 International Subsidiaries 250 130 320 Kotak Investment Advisors - 40 - Total 5200 7220 9190 MI, Equity Affiliates, Others -30-40 -230 Consolidated PAT 5170 7180 9420 2 KRChoksey - Institutional Research

Financials Income Statement INR in mn FY13 FY14 FY15E FY16E FY17E Interest income 80,425 87,671 155,236 186,972 226,199 Interest expenses 48,368 50,471 93,283 107,012 124,972 Net Interest Income 32,057 37,200 61,953 79,960 101,227 Non interest income 11,607 13,997 29,060 35,067 42,166 Operating income 43,663 51,198 91,012 115,027 143,393 Operating expenses 22,097 25,426 48,698 58,544 70,586 -Employee cost 10,751 11,722 24,230 29,106 34,904 Pre-provision profits 21,566 25,771 42,315 56,483 72,807 Provisions 1,846 3,047 4,769 5,855 8,138 Profit before tax 19,721 22,724 37,546 50,628 64,669 Tax expense 6,113 7,699 12,711 17,062 21,793 Net profit 13,607 15,025 24,834 33,567 42,876 Interest income 80,425 87,671 155,236 186,972 226,199 Interest expenses 48,368 50,471 93,283 107,012 124,972 Net Interest Income 32,057 37,200 61,953 79,960 101,227 Balance Sheet INR in mn Equity share capital 3,733 3,852 4,556 9,129 9,129 Reserve and Surplus 90,912 118,985 213,074 244,513 284,841 Net worth 94,645 122,836 217,631 253,642 293,969 Deposits 510,288 590,723 1,228,725 1,514,611 1,893,264 Borrowings 204,106 128,956 204,031 257,566 301,801 Other liabilities and provisions 27,898 33,338 93,143 96,498 100,440 Total 836,936 875,853 1,743,530 2,122,318 2,589,474 Cash in hand and Bal. with RBI 36,892 59,799 109,310 124,052 149,264 Investments 288,734 254,845 499,369 585,397 694,823 Advances 484,690 530,276 1,080,348 1,350,115 1,674,400 Fixed assets 4,644 11,069 17,228 19,811 22,615 Other assets 21,977 19,863 37,274 42,942 48,372 Total 836,937 875,853 1,743,530 2,122,318 2,589,474 DuPont Analysis (As % Average assets) NII 4.3% 4.3% 3.8% 4.1% 4.3% Fee Income 1.2% 1.3% 1.4% 1.4% 1.4% Treasury Income 0.2% 0.2% 0.2% 0.2% 0.2% Operating Cost 3.0% 3.0% 3.0% 3.0% 3.0% Provisions 0.2% 0.4% 0.3% 0.3% 0.3% Tax 0.8% 0.9% 0.8% 0.9% 0.9% RoAA 1.8% 1.8% 1.5% 1.7% 1.8% ROAE 15.6% 13.8% 12.1% 14.2% 15.7% Spread Analysis Avg Yield On Advances 14.1% 13.3% 12.0% 11.8% 11.7% Avg Yield On Investments 7.8% 7.7% 8.0% 8.0% 7.8% Avg Yield On Int Earning Assets 10.7% 10.1% 10.0% 10.0% 9.9% Avg Cost Of Deposits 7.5% 6.9% 6.9% 6.5% 6.2% Avg Cost of Funds 7.6% 7.0% 7.0% 6.6% 6.3% Spread 3.5% 3.6% 3.0% 3.4% 3.6% NIM 4.5% 4.5% 4.5% 4.0% 4.3% 3 KRChoksey - Institutional Research

Business Profile Advances 484,690 530,276 1,080,348 1,350,115 1,674,400 Credit Deposits ratio 95.0% 89.8% 87.9% 89.1% 88.4% Deposits 510,288 590,723 1,228,725 1,514,611 1,893,264 CASA Deposits 283,534 325,865 425,545 542,764 678,455 CASA Ratio 29.2% 31.9% 34.6% 35.8% 35.8% Asset Quality Gross NPA 7,688 13,224 16,221 20,944 24,418 Net NPA 3,376 7,374 8,435 10,891 12,209 Gross NPA as % of Advances 1.5% 2.0% 1.5% 1.5% 1.4% Net NPA as % of Advances 0.6% 1.1% 0.8% 0.8% 0.7% Credit Costs 0.5% 0.3% 0.4% 0.6% 0.7% Growth ratios Net interest income 27.6% 16.0% 46.7% 29.1% 26.6% Pre-provision Profits 30.0% 43.8% 41.2% 88.4% 28.9% Net Profits 25.4% 10.4% 24.2% 33.1% 35.2% Advances 18.3% 67.6% 63.3% 104.1% 24.0% Deposits 25.3% 69.8% 64.1% 102.3% 25.0% Total Assets 23.0% 69.0% 64.5% 100.2% 22.0% Per share Data and valuation (INR) EPS 18.3 19.8 24.1 24.5 23.5 DPS 0.7 0.8 1.1 1.3 1.2 BVPS 126.8 159.5 238.8 138.9 161.0 ABVPS 124.1 154.7 232.9 135.1 156.7 P/E 37.4 34.6 28.4 27.9 29.2 P/ABV 5.5 4.4 2.9 5.1 4.4 Dividend Yield 0.1% 0.1% 0.2% 0.2% 0.2% 4 KRChoksey - Institutional Research

Kotak Mahindra Bank Date CMP Target Recommendation 03-Nov-15 685 720 HOLD 13-Apr-15 1,422 1,400 REDUCE 21-Jan-15 1,389 1,400 HOLD 7-Jan-15 1,251 1,260 HOLD 28-Oct-14 1088 1111 HOLD 8-Oct-14 1006 1050 HOLD 16-Jul-14 884 1000 ACCUMULATE 9-Jul-14 869 1000 BUY 2-May-14 803 835 HOLD 9-Apr-14 755 670 SELL Rating Legend Our Rating Upside Buy More than 15% Accumulate 5% - 15% Hold 0 5% Reduce -5% 0 Sell Less than -5% ANALYST CERTIFICATION: I, Shweta Mane-Daptardar (B.Com, MBA), research associate, author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & Conditions and other disclosures: KRChoksey Shares and Securities Pvt. 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