Result Update

January 19, 2016

Rating matrix
Rating : Hold Kotak Mahindra Bank (KOTMAH) | 671
Target : | 677
Target Period : 12 months
Potential Upside : 1% Synergy benefits with prudent asset quality
Whats changed? PAT came in at | 635 crore, above our estimate of | 584 crore. The
Target Unchanged variation was primarily due to higher-than-expected non-interest
EPS FY16E Changed from | 10.6 to | 11.7 income at | 722 crore (I-direct estimate - | 658.8 crore). In addition,
EPS FY17E Changed from | 12.8 to | 14.2 opex came in lower at | 1283 crore (I-direct estimate - | 1322 crore)
Rating Unchanged
Provision came in higher at | 235 crore, in lieu of securities receipts
Quarterly performance (SR) and credit substitutes wherein a significant portion was
| Crore Q3FY16 Q3FY15 YoY (%) Q2FY16 QoQ (%) contributed by ING Vysya Bank. Asset quality remained resilient with
NII 1766.2 1551.1 13.9 1678.7 5.2 QoQ net GNPA addition at | 35 crore with absolute GNPA at | 2690
Other Income 722.2 1017.7 -29.0 1044.8 -30.9 crore (improvement of 5 bps QoQ to 2.3%)
PPP 1205.2 1017.7 18.4 1044.8 15.4 NIM remained steady QoQ, at 4.3% in Q3FY16, which led to 5.2%
PAT 634.7 610.2 4.0 569.5 11.5 QoQ growth in NII at | 1766 crore (I-direct estimate - | 1744 crore).
Key financials (Merged)
The bank has incurred | 35 crore in Q3FY16 on realignment and
| crore FY14 FY15 FY16E FY17E
thereby higher interest outgo on ING Vysya Banks saving deposits
NII 5473 6142 6957 7959 The credit book grew 9.6% YoY to | 115345 crore, lower-than our
PPP 3705 4166 4170 4853 estimate of | 123081 crore. Deposit accretion came in at 10.0% YoY
PAT 2165 2477 2121 2587 to | 130939 crore with CASA ratio at 35.3%
The management has maintained its guidance of incremental 80-85 bps
Valuation summary (Merged) credit cost in FY16E and combined advance growth of ~15% in FY16E.
FY14 FY15 FY16E FY17E
P/E 75.0 51.9 60.6 49.7
Credit book to grow at ~14% CAGR in FY16-17E
Target P/E 71.8 49.7 58.0 47.5 Kotak Mahindra Bank, promoted by Uday Kotak, post receiving a licence
P/ABV 8.6 6.1 5.6 5.0 in 2002, grew to a loan book size of | 103614 crore in FY15. It has built a
Target P/ABV 8.3 5.9 5.4 4.9 branch network of 1298 branches. Retail loans form ~50% of total loans,
RoA 1.5 1.5 1.1 1.2 enabling KMB to earn the best NIM in industry at 4.5-4.9% led by high
RoE 13.0 12.1 9.3 10.3 yielding retail loans. With the ING Vysya Bank merger, composition of the
Stock data loan portfolio has been altered with retail advances proportion declining
Market Capitalisation | 122823 crore to ~42% from 50%. Accordingly, blended margins are expected to
GNPA (Q3FY16) | 2690 crore remain steady. Credit book (merged entity) has been revised lower and is
NNPA (Q3FY16) | 1111 crore expected to grow at 13.7% CAGR in FY15-17E to | 140996 crore.
NIM (Q3FY16) 4.3% CASA accretion to continue at healthy pace
52 week H/L 744/594
The savings rate was hiked to 6% by KMB post deregulation by RBI in
Equity capital | 453 crore
Face value |5
September 2010. The bank almost tripled its savings deposits from | 3331
DII holding (%) 4.2 crore in March 2011 to | 14036 crore by March 2015. CASA ratio
FII holding (%) 34.7 improved from 28-29% in the past to 32-33% and is seen averaging
around 32-34% in merged bank. For the combined entity, post merger,
Price performance we expect deposit growth at 16.1% CAGR to | 165661 crore in FY17E.
R e turn % 1M 3M 6M 12M
Strong management, business model and controlled asset quality
K ota k Ma hindra ba nk -5.0 1.2 -9.0 -4.3
H D F C B a nk -4.4 -6.7 -7.6 2.4 KMB had stable asset quality with NNPA ratio of 1% and negligible
Axis B a nk -13.7 -26.0 -38.0 -27.5 restructured assets. With the merger, GNPA ratio is seen rising to 2.4%,
NNPA ratio to 1.0% in FY16E but overall asset quality remains
Research Analyst manageable. PAT in FY15 remained healthy at | 1866 crore (24% YoY).
Kajal Gandhi Post merger, we expect PAT to grow at 13.6% in FY16E and 22% in
kajal.gandhi@icicisecurities.com FY17E to | 2587 crore.
Vishal Narnolia Maintain HOLD, synergy benefit may lead to upward re-rating
vishal.narnolia@icicisecurities.com
KMB has been trading at rich valuations consistently due to its superior
Vasant Lohiya
vasant.lohiya@icicisecurities.com return ratios and NIM (RoA of ~1.8% and NIM at ~4.8-5%). For the
merged entity, NIMs and RoA are expected to remain at steady at ~4%
and 10.3% in FY17E, and will continue to stay better than peers. Factoring
in higher-than-expected bottomline, check on integration expense and
prudent asset quality, we have marginally revised our FY16-17E estimates
upwards. With business synergies expected to gain further traction, we
maintain our target price at | 677, valuing the stock on SOTP basis.
Maintaining multiple at 4.0x for the bank, we reiterate HOLD rating.

ICICI Securities Ltd | Retail Equity Research

Variance analysis
Q3FY16 Q3FY16E Q3FY15 YoY (%) Q2FY16 QoQ (%) Comments
NII 1,766.2 1,744.3 1,551.1 13.9 1,678.7 5.2
NIM (%) 4.30 4.30 4.70 -40 bps 4.30 0 bps Steady NIM supports NII growth
Treasury income came in at | 259 crore vs | 159 crore in Q2FY16
Other Income 722.2 658.8 699.7 3.2 615.7 17.3 (including | 62 crore of one-time income reversal in Q2FY16)

Net Total Income 2,488.4 2,403.2 2,250.8 10.6 2,294.5 8.5

Staff cost 618.2 594.8 615.8 0.4 623.0 -0.8 Integration cost of | 13 crore in Q3FY16; | 142 crore in 9MFY16
Other Operating Expenses 665.0 727.0 617.3 7.7 626.7 6.1

PPP 1,205.2 1,081.4 1,017.7 18.4 1,044.8 15.4

Higher-than-expected provision owing to provision related on SRs and
Provision 235.3 209.2 91.4 157.3 176.4 33.4 credit substitutes
PBT 970.0 872.2 926.2 4.7 868.4 11.7
Tax Outgo 335.2 287.8 316.0 6.1 298.9 12.2
PAT growth came in higher-than-expected due to lower opex and higher
PAT 634.7 584.4 610.2 4.0 569.5 11.5 non-interest income

Key Metrics
GNPA 2,690.3 2,788.1 1,983.9 35.6 2,655.4 1.3 GNPA improved 5 bps QoQ to 2.3%
NNPA 1,110.8 1,214.3 898.1 23.7 1,167.6 -4.9 NNPA improved 9 bps at 0.96%

Total Restructured assets 346.0 41.7 159.1 117.5 403.0 -14.1 Standard RA at | 346 crore of which | 202 crore is from ING Vysya Bank
Source: Company, ICICIdirect.com Research

Change in estimates
FY16E FY17E
(| Crore) Old New % Change Old New % Change Comments
Net Interest Income 6,594.9 6,957.2 5.5 7,288.4 7,958.9 9.2
Pre Provision Profit 3,874.7 4,169.6 7.6 4,322.1 4,852.8 12.3
NIM (%) 3.6 3.9 34 bps 3.5 4.0 51 bps
PAT estimate revised upwards led by lower opex and higher traction in non-interest
PAT 1,932.4 2,120.8 9.7 2,331.2 2,586.5 11.0 income
ABV (|) 121.2 124.6 2.8 132.3 137.9 4.2
Source: Company, ICICIdirect.com Research

Assumptions
Current Earlier
FY14 FY15 FY16E FY17E FY16E FY17E Comments
Credit growth (%) 9.4 24.8 83.2 16.3 92.5 18.7
Deposit growth (%) 15.8 26.7 86.9 18.4 97.9 19.9
CASA ratio (%) 32.5 35.4 35.5 35.5 35.8 35.5
NIM calculated (%) 4.5 4.5 3.9 4.0 3.6 3.5
Reduced C/I estimate in anticipation of lower incremental opex owing to
Cost to income ratio (%) 49.7 52.1 57.1 56.6 59.0 59.2 synergy benefit
GNPA (| crore) 1,703.8 2,010.4 2,920.7 3,389.0 3,173.7 3,891.8
NNPA (| crore) 675.7 779.8 1,237.7 1,438.1 1,488.0 1,854.6
Slippage ratio (%) 1.6 1.0 1.1 1.0 1.3 1.2
Credit cost (%) 0.4 0.3 0.8 0.7 0.8 0.5 Management guidance at 80 bps for credit cost for FY16E
Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 2

 Company Analysis
Business aspects
Kotak Mahindra Bank has a presence across all financial verticals, namely
banking, securities, investment banking, asset management, consumer
finance and life insurance. The company has a diversified product offering
and has an experienced management.
In the past six years, credit and deposit CAGR has been 26% and 29%,
respectively, to | 66161 crore and | 74860 crore by FY15, higher than
industry averages. Kotak Bank has largely been a retail lender with 64% of
its loan book in retail in FY10. It has now moderated to 44% in FY15. In
FY15, credit grew 24.8% YoY and deposits 26.7% YoY. In FY15, advances
growth recovered with corporate banking loans surging 26% YoY while
overall growth was 24.8% YoY to | 66161 crore. Ex CV/CE, growth was
28.2% YoY. Deposits grew a strong 26.7% YoY to | 74860 crore.
Post merger, Kotak Banks loan book was at | 115345 crore with alteration
Going ahead, the management has guided ~15% growth in
in composition of loan portfolio, retail advances proportion declining to
advance in FY16E
~42% from 50%. Going ahead, we expect credit offtake at 13.7% CAGR
in FY15-17E to | 140996 crore.
Exhibit 1: On YoY basis healthy business growth
180000

165661
150000

140996
139880
120000

130939
(| crore)

123212
122968

121189
119018

116812

115345
112755

111662
109155
90000 105198
103676

103614
100506
100289

95101
88856

60000
.
30000

0
FY14

Q1FY15

Q2FY15

Q3FY15

FY15

Q1FY16

Q2FY16

Q3FY16

FY16E

FY17E
Advances Deposits

Source: Company quarterly earnings update , ICICIdirect.com Research

Retail loans now constitute ~42.2% of total credit in standalone whereas

due to auto loans of Kotak Prime, in consolidated, retail forms ~43% of
total credit of | 125522 crore as on FY15.
Exhibit 2: Loan book movement over the years (standalone)
| crore Q2FY14 Q3FY14 FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Growth yoy (%)
CVs and contruction eqmt. 6781 6005 5441 5104 5062 5027 5204 5626 6123 6550 30.3
Personal Loans incl small busines 3082 3156 4632 4723 5301 5929 6263 7429 8171 8813 48.6
Home loans 11307 11454 12100 12312 12894 13738 14709 20756 21697 22327 62.5
Corporate banking 14759 16621 14337 18568 21140 22044 20299 31205 33909 35239 59.9
Agricultural finance 7910 9023 10468 9941 10137 10849 12106 15268 17112 16811 55.0
Others 6770 6890 6010 706 759 7054 1158 1854 2034 2223 -68.5
Total 50609 53149 52988 56922 55293 64641 66161 103614 111662 115345 78.4

Source: Company, ICICIdirect.com Research

KMB earned the best NIM in the industry at 4.7-5% led by high yielding
retail loans and working capital corporate loans. NII has grown from
| 1858 crore in FY10 to | 4224 crore by FY15 supported by strong credit
and savings deposit growth. Post merger, NIM has declined to 4.2% in
Q1FY16, owing to a decline in proportion of high yield retail credit and
higher interest outgo on saving account of ING Vysya Bank. However, in
Q2FY16, NIM improved 12 bps QoQ due to lower cost of deposit led by
higher accretion in CASA at 36.2%. In Q3FY16, NIM continued to remain

ICICI Securities Ltd | Retail Equity Research Page 3

 steady at 4.3%. Going ahead, change in loan mix is expected to keep
blended margins at current levels. However, owing to faster addition to
saving account and substantial proportion of fixed rate book with
southward movement in interest rates, we expect NIM to remain broadly
near ~4% in FY16-17E. Further, as integration benefits unfold with
proportion of retail advances rising in overall book, NIMs are expected to
revive and inch up, currently not factored by us.
Exhibit 3: Increase in NIM led by higher CASA accretion

5.2
5.0 5.0 5.0
4.9 4.9 4.9
4.8 4.8 4.8 4.8

(%)
4.7 4.7 4.7
4.6 4.6 4.6 4.6
4.4
4.3 4.3
4.2 4.2
4.0
Q3FY12

Q4FY12

Q1FY13

Q2FY13

Q3FY13

Q4FY13

Q1FY14

Q2FY14

Q3FY14

Q4FY14

Q1FY15

Q2FY15

Q3FY15

FY15

Q1FY16

Q2FY16

Q3FY16
Series1

Source: Company quarterly earnings update, ICICIdirect.com Research

Deposit franchise (branches) build-up gradually enabled KMB to maintain

healthy margins of >4.5% since FY08 despite a challenging environment.
In the past two or three years due to higher focus on savings deposits,
CASA has been stable at 31% wherein other banks saw a decline in
CASA. The combined branch network post merger is at 1298 as of
December 2015.
With strong CASA deposits growth at 24% YoY to | 44657 crore,
branches are expected to deliver a strong performance over time. Initial
cost is incurred on employees and set-up upfront. We expect deposits to
grow at 16.1% CAGR to | 165661 crore in FY17E.
Exhibit 4: Branch network grows to 1298 branches to support CASA accretion

1400
1200
1000
800
600
`
400
200
0
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Q3FY13
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16

Source: Company quarterly earnings update, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 4

 Other income growth remains strong
Non interest income has grown 44.9% to | 2028 crore in FY15. Core fee
income and treasury gains enabled the bank to achieve stronger other
income. Q3FY16 saw muted YoY increase of 3.2% in non interest income
to | 722 crore, post a decline in Q2FY16 due to one-time impact of | 62
crore related to an account of credit event of a derivative customer. Also,
a change in mutual fund fees recognition from upfront to over the life, has
led to lower fee income. We expect non-interest income traction to
remain slower in FY16E and then pick up in FY17E. Hence, we expect
4.6% CAGR in FY16-17E to | 3213 crore.

Strong management, business model and controlled asset quality

KMBs asset quality has been one of the most stable with NNPA ratio of
~1% and negligible restructured assets. This depicts the strong
operational business model of the bank and the management having full
control.
Exhibit 5: NPA levels maintained at comfortable levels
3.0
2.6
2.2 2.3 2.4 2.3 2.4 2.4
Kotak Bank has identified total stress to the tune of 6% in 2.0 2.0 2.0 2.0 1.9 1.9 1.9 1.9
erstwhile ING Vysya Banks book, which constitutes 2.5% 1.8
1.6 1.5 1.6 1.6 1.6
1.4 1.5 1.6
(%)

of the merged entity

1.0 1.0 1.0 1.1 1.1 1.0 1.0 1.0 0.9 1.0 1.1 1.0 1.0 1.0
0.8 0.8
0.6 0.6 0.6 0.6 0.6 0.6
0.2
-0.2
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Q3FY13
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
FY15
Q1FY16
Q2FY16
Q3FY16
FY16E
FY17E
GNPA NNPA

Source: Company quarterly earnings update, ICICIdirect.com Research

GNPA surged QoQ by ~40 bps at 2.3% in Q1FY16 owing to merger

related incremental addition of stressed assets. Kotak Mahindra Bank has
identified total stress to the tune of 6% in erstwhile ING Vysya Banks
book, which constitutes 2.5% of the merged entity. In Q3FY16, asset
quality remained resilient with GNPA at 2.3%, a sequential improvement
of 5 bps. Standard restructured loans were at | 346 crore (0.3% of net
advances) owing to | 202 crore from the erstwhile ING Vysya Bank.
We expect GNPA and NNPA ratios to remain broadly stable at 2.4% and
1.0%, respectively, by FY17E. Credit cost is expected to remain higher at
80 bps (annualised) in FY16E and then come down at 0.5% (annualised) in
FY17E (management indicates additional 50 bps credit cost on account of
integration).

ICICI Securities Ltd | Retail Equity Research Page 5

 Healthy performance of consolidated entity
Exhibit 6: Consolidated profit over the years, ex-bank other subsidiaries form ~35% of PAT
Q3FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16
Kotak Bank 276 282 280 362 436 403 353 340 407 430 626 611 527 191 570 635
Kotak Securities 24 23 40 38 *13 31 40 46 44 68 66 60 96 67 78 55
Kotak Mahindra Capital 4 6 4 2 4 4 -2 7 5 -4 -7 -6 30 3 7 6
Kotak Prime 104 94 114 105 119 117 125 123 126 120 125 120 143 119 127 126
Kotak AMC & Trust 3 4 -5 11 2 7 17 12 4 0 -1 -10 -18 20 23 4
International Subsidiaries -4 -5 8 5 -1 -10 1 9 6 7 13 14 18 25 32 26
Kotak Investment advisors 7 8 9 6 8 1 4 7 5 8 4 2 11 0 0 -1
Kotak Mahindra Investments 3 4 16 8 5 4 11 11 16 17 25 24 40 30 36 39
Kotak Mahindra Old Mutual 47 32 47 53 58 71 44 60 65 49 52 51 76 66 48 60
Total (net off aflliates/minority) 464 443 502 577 666 627 583 591 678 695 899 863 913 518 942 949
Source: Company, ICICIdirect.com Research

Exhibit 7: Profitability performance at consolidated level

PAT (| crore) Q3FY16 Q3FY15 YOY (%) Q2FY16 QoQ (%)
Kotak Bank 634.7 611.2 3.8 569.5 11.5
Kotak Securities 55.0 60.0 -8.3 78.0 -29.5
Kotak Mahindra Capital 6.0 -6.0 NA 7.0 NA
Kotak Prime 126.0 120.0 5.0 127.0 -0.8
Kotak AMC & Trust 4.0 -10.0 NA 23.0 NA
International Subsidiaries 26.0 14.0 NA 32.0 -18.8
Kotak Investment advisors -1.0 2.0 NA 0.0 NA
Kotak Mahindra Investments 39.0 24.0 62.5 36.0 8.3
Kotak Mahindra Old Mutual 60.0 51.0 17.6 48.0 25.0
Total (net off equity aflliates/minority) 948.7 862.6 10.0 941.5 0.8
Source: Company quarterly earnings update, ICICIdirect.com Research

Kotak Prime
The overall loan book has increased nearly four times in seven years from
| 5615 crore to | 21851 crore in Q3FY16. Kotak Prime, the next highest
profit making segment, witnessed loan growth of 14.6% YoY to | 21851
crore in Q3FY16 while car loans within the same grew 15.4% YoY to
| 16432 crore, thereby running down erstwhile real estate exposure. PAT
came in flat QoQ and grew 5% YoY at | 126 crore.

Exhibit 8: Kotak Mahindra Prime profitability on slower track

| Crore Q3FY16 Q2FY16 Q3FY15 YoY Gr. (%) QoQ Gr. (%)
PBT 193.0 195.0 183.0 5.5 -1.0
PAT 126.0 127.0 120.0 5.0 -0.8
Loans 21851.0 20013.0 19073.0 14.6 9.2
-car loans in same 16432.0 15754.0 14234.0 15.4 4.3
CAR (%) 18.3 18.3 - -
ROA (%) 2.5 2.5 - -
NET NPA -cars (%) 0.4 0.4 - -
Source: Company quarterly earnings update, ICICIdirect.com Research

Exhibit 9: Kotak Prime second highest profit contributor

Q3FY16 Q2FY16 Q1FY16 Q4FY15 Q3FY15 Q2FY15 Q1FY15 Q4FY14 Q3FY14 Q2FY14 Q1FY14 Q4FY13 Q3FY13 Q2FY13 Q1FY13
PBT 193 195 183 218 183 190 183 192 190 191 179 174 158 170 139
PAT 126 127 119 143 120 125 120 126 123 125 117 119 105 114 94
Loans 21851 20013 19728 19707 19073 18819 17693 17371 16858 16952 17093 17022 16042 15173 14114
-car loans 16432 15754 15070 14726 14234 13946 13418 13273 13066 13136 13055 12777 12237 11756 11154
CAR 18.3 18.3 18.3 18.3 17.3 17.7 17 17.7 17.1 16.4 16 15.4 15.8 15.8 15.9
ROA 2.5 2.5 2.5 2.5 2.3 2.5 2.5 2.6 2.6 2.6 2.5 2.6 2.4 2.8 2.4
Net NPA -cars 0.40% 0.44% 0.5% 0.4% 0.4% 0.3% 0.3% 0.3% 0.4% 0.3% 0.2% 0.2% 0.2% 0.2% 0.1%

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 6

 Kotak Securities
Kotak Securities (K-Sec), a KMB subsidiary, has been one of the large
stock broking firms offering both retail and institutional services. It had
9% market share in FY07, which declined to as low at 2.7% currently on
account of rising options volume generating lower yields and relative
lower push by the broker in the same. The company clocked an average
daily turnover of | 3,720 crore in FY07 and was at | 3920 crore in FY14,
which rose to | 7593 crore in Q2FY16 on the back of increased volumes
in the industry. However, in Q3FY16, market volumes remained weak
with Kotaks daily turnover at | 6481 crore.
The end of the JV with Goldman Sachs in May 2006 has not made any
meaningful impact on its market share. Competition intensified in the
recent past in the Indian broking space, which resulted in a fall in broking
yields for all players.
Exhibit 10: Average daily turnover trend

9000
8000
7000
6000
(| Crore)

5000

8372
8372
7813
7593
4000

6621

6481
6053
5205

3000
4648
4522

4261

4248
4160
4137
3925

3903
3814

3720
3673

3692
3600

3582

3343
3300
2000
1000
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Q3FY13
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Source: Company, ICICIdirect.com Research

Exhibit 11: Market share in average daily volume surges in Q2FY16 (reported)

4
3.9
3.8 3.8 3.7 3.8
3.6
3.5
3.4
3.2
The market share of Kotak Securities remained at 2.7% in
3 3.0 2.9 2.9 2.9 2.9
(%)

Q3FY16
2.8 2.8 2.85
2.7 2.7 2.7 2.7 2.7
2.6 2.6
2.5 2.5 2.5
2.4 2.4 2.4
2.3
2.2 2.2
2
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Q3FY13
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16

Source: Company quarterly earnings update, ICICIdirect.com Research

In Q3FY16, Kotak Securities topline remained muted at 2.2% YoY to

| 228 crore, on lower daily volume of | 6481 crore vs. | 8372 crore in
Q3FY15. PAT came in at | 55 crore, a decline of 8.3% YoY owing to lower
topline during the quarter.

Kotak Mahindra Old Mutual Life Insurance is a 74:26 JV between Kotak

Mahindra Bank and Old Mutual Life. Kotak Life had managed to capture
market share of ~3%. It recorded 74% CAGR in annualised premium
equivalent (APE) over FY04-07. Post FY09, after which growth collapsed,

ICICI Securities Ltd | Retail Equity Research Page 7

 annualised premium equivalent (APE) has been hovering around | 1000
crore till now. Annual profits touched around | 229 crore as on FY15
growing from | 14 crore in FY09.
The life insurance performance has stabilised with traction returning in
terms of new business premium accretion. After de-growing in FY14, new
business premium surged 38.7% YoY in Q3FY16 to | 418.5 crore. Q3FY16
PAT was at | 60 crore led by strong individual premium growth.
On APE (Single @ 1/10th) basis, Kotak Banks share for Exhibit 12: Life insurance business statistics on APE basis market share at 48%
Q3FY16 is 48% (Q3FY15 34%) for first year individual Premium (| crore) Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15
premium Renewal 527.0 240.0 337.0 350.0 571.0
Indvl Regular 186.0 58.0 111.0 133.0 301.0 124.0 202.0 211.0
Group 205.0 134.0 170.0 159.0 328.0 248.0 239.0 205.0
Single 88.0 26.0 50.0 26.0 46.0 16.0 20.0 25.0
New Business Premium 479.0 218.0 331.0 318.0 675.0 388.0 461.0 441.0
APE 399.8 194.6 286.0 294.6 633.6 373.6 443.0 418.5
Solvency Ratio (%) 3.2 3.1 3.0 3.0 3.1 3.2 3.2 3.2
PAT 65.0 49.0 52.0 51.0 76.0 66.0 48.0 60.0
Source: Company quarterly earnings update, ICICIdirect.com Research

Kotak Mahindra Asset Management

Kotak AMC has grown its average AUM at 21% CAGR to | 38600 crore by
FY07-15. Its share of equity in total has been rising gradually from 14% in
FY09 to 24% in FY14. In Q3FY16, average AUM grew 41.1% YoY to
| 55133 crore. However, PAT got hit at | 4 crore in Q3FY16, owing to a
one-time operational loss during the quarter.

Kotak Mahindra Capital (KMCC)

The Kotak Mahindra Group carries on its investment banking business
through Kotak Mahindra Capital Company (KMCC), a subsidiary of Kotak
Mahindra Bank (KMB). Kotak bought the 25% stake held by Goldman
Sachs in KMCC in May 2006 by paying | 210 crore, making it a 100%
subsidiary. KMCC has a strong presence in managing equity issuances
and advising on M&A transactions and has benefited largely from the
boom in investment banking activity in India. The company de-merged its
principal and trading investments division (including primary dealership)
in March 2007 (to free up surplus capital) and now primarily operates as a
full service investment bank, offering advisory and transactional services.
It earned revenue of | 28 crore and PAT of | 6 crore in Q3FY16.

ICICI Securities Ltd | Retail Equity Research Page 8

 Outlook and valuation
KMB has been trading at rich valuations consistently due to its superior
return ratios with FY15 RoA of 1.9%. It earns highest NIM in the industry.
This depicts its strong operational business model and management
having full control via consistent performance.

With the ING Vysya Bank merger, the bank brought down the promoter
stake from 40% to 34% and also added value and geographical synergies
in the company. For the merged entity, NIMs and RoA are expected to
remain at steady at ~4% and 10.3% in FY17E, and will continue to remain
better than peers. Factoring in higher-than-expected bottomline, check on
integration expense and prudent asset quality, we have marginally
revised our FY16-17E estimates upwards. With business synergies
expected to gain further traction, we maintain our target price at | 677,
valuing the stock on SOTP basis. Maintaining the multiple at 4.0x for the
bank, we maintain HOLD rating.

Exhibit 13: DuPont Analysis (Bank standalone)

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E
Net interest income/ avg. total assets 5.1 5.3 5.6 4.8 4.3 4.6 3.8 3.8 3.8 3.8
Non-interest income/ avg. total assets 1.9 1.0 1.9 1.8 1.7 1.8 1.6 1.8 1.5 1.5
Non-operating profit/ avg. total assets 7.0 6.3 7.5 6.5 6.0 6.5 5.4 5.6 5.3 5.3
Operating expenses/ avg. total assets 4.2 4.2 3.6 3.5 3.1 3.4 2.8 3.0 3.0 3.0
Operating profit/ avg. total assets 2.8 2.1 3.9 3.0 2.8 3.1 2.6 2.6 2.3 2.3
Provisions/ avg. total assets 1.1 0.6 1.5 0.3 0.1 0.3 0.3 0.3 0.5 0.5
Return on avg. total assets 1.2 1.0 1.7 1.9 1.9 1.9 1.5 1.5 1.1 1.2
Leverage 9.3 7.8 8.0 7.8 7.9 9.3 8.6 7.9 8.1 8.4
Return on equity 11.4 7.5 13.5 14.5 14.7 17.9 13.0 12.1 9.3 10.3
Source: Company, ICICIdirect.com Research

Exhibit 14: Valuation

FY14 FY15 FY16E FY17E
EPS (|) 9.4 13.6 11.7 14.2
Growth (%) 1.2 44.6 -14.4 22.0
P/E (x) 75.0 51.9 60.6 49.7
ABV 81.3 114.8 124.6 137.9
P/ABV (x) 8.6 6.1 5.6 5.0
GNPA (%) 1.9 1.8 2.4 2.4
RoNA (%) 1.5 1.5 1.1 1.2
RoE (%) 13.0 12.1 9.3 10.3
Source: Company, ICICIdirect.com Research

Exhibit 15: Valuation (|) Merged Entity

Company Value / share
KMB (Merged entity) 551
Kotak Life 23
Kotak Mahindra Prime 59
Kotak Mahindra Capital 11
Kotak Securities 29
Kotak AUM 12
686

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 9

 Details about merger with ING Vysya Bank (September 2014)
Effective April 1, 2015, ING Vysya Bank will merge with Kotak Bank as it
has received Competition Commission of India (CCI) and RBI approval for
an all-stock amalgamation among the banks. Post merger, Kotak
Mahindra Bank will become the fourth largest private bank with branches
at 1261, business size of | 230000 crore, employees at ~40000 and
customers at ~10 million.
With ~15.2% dilution of equity share capital, promoter holding in Kotak
Mahindra Bank is expected to decline to 34% from 40% currently, in line
with RBIs direction to bring down their holding to 30% by December
2016 and 20% by March 2018.
Rationale for deal
1. The merger would give Kotak Bank a deeper presence in southern
India as ING Vysya has two-third of its 577 branches in south. Kotak
Bank has 79% of its 684 branches in western & northern region. Thus,
the merger provides larger presence with minimum overlap
2. The merger would yield more liquidity with significant foreign
headroom in Kotak Bank even post merger, with foreign shareholding
at ~47% in the merged entity. The management indicated that they
will apply to RBI for raising the foreign holding limit to 74% from 49%
currently
3. The merger will allow Kotak Bank to leverage on large international
corporates in India with access to overseas relationships of ING
Group
4. The merger is also beneficial on the liability front as both banks have
CASA ratio of ~31%. Owing to the strong SME business, ING Vysyas
CA float is healthy. Further, there is large scope for garnering savings
balances as Kotak Bank offers a higher rate of 5.5-6%
Merged entity will have 441 branches in the Top 8 cities
Owing to lower NIMs and higher CI ratio of ING Vysya Bank, Kotaks
banking business RoA is expected to decline to ~1.0% from 1.8%
immediately. RoA can further be maintained at 1.0% in FY15-17E.
However, we believe the benefits of merger synergies will accrue over
time, which will enable the merged entity to clock healthy return ratios
post FY17E.

Exhibit 16: Combined branch network (FY15) status (Total ~1261)

Branches ING Vysya Kotak Bank Kotak (Merged)
West 13% 46% 31%
North 22% 33% 28%
South 61% 15% 36%
East 4% 6% 5%
Source: Company, ICICIdirect.com Research

Exhibit 17: Advances mix (Q3FY15)

% ING Kotak Bank Merged
Agri 11 12 12
SME 38 7 17
Large corporates 39 31 33
Retail 19 50 40
Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 10

Company snapshot

800

700

600

500 Target Price: | 677

400

300

200

100

0
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-16
May-16
Sep-16
Jan-17
Source: Bloomberg, Company, ICICIdirect.com Research

Key events
Date Event
Mar-03 Promoter stake was at 63% in the bank, post incorporation in 2002
May-05 Announced bonus shares
May-07 In peak market, capital market related businesses were doing well and getting higher valuation multiples. Bank's market cap share in total market used tobe less
FY08 Announced stock split, FV reduced to 5 from 10
Jun-09 Anand Mahindra ceased to be a promoter of the bank
Feb-11 Bank aspired to be national, inorganic (route) is something that was on radar also. Thereafter, the stock saw a new rally and is rising continuously
Oct-11 Savings rate de-regulated by RBI, Kotak Bank offered higher interest rate of 6% above | 1 lakh and 5% below | 1 lakh vs the floor of 4%. This has been very helpful in
saving balance increase as it started adding | 600-800 crore in a quarter post this hike.
Mar-12 Asset quality maintained even with a large commercial vehicle and construction equipment portfolio
Jul-12 RBI asked promoters of Kotak Mahindra Bank to cut their stake in the bank to 20% from 45 % by 2018. With expectation of continuous dilution at higher multiple of
BV, stock price remained on an uptrend
May-13 G-sec yields spiked post Fed announcement on May 22 of its intention to taper QE and tight liquidity measures by RBI of MSF rate hike etc, impacted banks,
particularly wholesale funded however Kotak Bank although being lower on CASA remained resilient
Oct-13 Post liquidity tightening measures like MSF reversed by RBI, stock saw respite
Nov-14 Announced merger with ING Vysya Bank in ratio of 725 shares of Kotak bank for 1000 shares of ING Vysya Bank
Jan-15 Merger approved by shareholders
Apr-15 Scheme of amalgamation of Kotak Mahindra Bank and ING Vysya Bank comes into effect from April 1, 2015
Source: Company, ICICIdirect.com Research

Top 10 Shareholders Shareholding Pattern

Rank Name Latest Filing Date % O/S Position (m) Change (m) (in %) Jun-14 Sep-14 Dec-14 Jun-15 Sep-15
1 Kotak (Uday Suresh) 30-Sep-15 33.45 613.2 0.6 Promoter 40.33 40.07 40.05 33.86 33.77
2 ING Bank N.V. 30-Sep-15 6.43 117.9 0.0 FII 35.09 34.61 35.09 35.32 34.67
3 Capital International, Inc. 30-Sep-15 5.92 108.5 1.4 DII 1.78 2.01 2.03 3.69 4.22
4 Capital World Investors 30-Sep-15 5.89 108.0 1.1 Others 22.80 23.31 22.66 27.13 27.34
5 CPP Investment Board 30-Sep-15 3.91 71.7 0.0
6 Sumitomo Mitsui Banking Corp 30-Sep-15 3.58 65.6 0.0
7 Capital Research Global Investors 30-Sep-15 2.89 53.0 13.6
8 Stewart Investors 30-Sep-15 2.30 42.2 5.2
9 Genesis Investment Management, LLP 30-Nov-15 1.93 35.3 0.0
10 Caladium Investments Pte. Ltd. 30-Sep-15 1.59 29.2 -0.8
Source: Reuters, ICICIdirect.com Research
Recent Activity (| crore and shares in mn)
Buys Sells
Investor name Value Shares Investor name Value Shares
ING Bank N.V. ,284.59m 117.90m Caladium Investments Pte. Ltd. -108.96m -10.00m
Capital International, Inc. 377.43m 34.64m Matthews International Capital Management, L.L.C. -81.72m -7.50m
Capital Research Global Investors 211.08m 19.37m Lyxor Asset Management -33.55m -3.31m
Birla Sun Life Asset Management Company Ltd. 91.63m 8.35m Kotak Mahindra Asset Management Company Ltd. -28.36m -3.20m
Norges Bank Investment Management (NBIM) 37.83m 3.77m First State Investment Management (UK) Limited -27.44m -3.08m
Source: Reuters, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 11

Financial summary
Profit and loss statement | Crore Key Ratios
(Year-end March) FY14 FY15 FY16E FY17E (Year-end March) FY14 FY15 FY16E FY17E
Interest Earned 8767.1 9719.9 16790.5 19061.2 Valuation
Interest Expended 5047.1 5496.1 9833.3 11102.3 No. of Equity Shares 77.0 154.5 181.7 181.7
Net Interest Income 3720.0 4223.8 6957.2 7958.9 EPS (|) 19.5 12.1 11.7 14.2
growth (%) 16.0 13.5 64.7 14.4 BV (|) 159.4 91.3 131.4 145.8
Non Interest Income 1399.7 2028.4 2760.9 3212.8 BV-ADJ (|) 151.9 87.4 124.6 137.9
Net Income 5119.8 6252.2 9718.1 11171.7 P/E 71.2 114.9 60.6 49.7
Operating expense 2542.7 3254.7 5548.5 6318.9 P/BV 9.1 15.9 5.7 5.1
Gross profit 2577.1 2997.5 4169.6 4852.8 P/ABV 9.0 15.6 5.6 5.0
Provisions 304.7 164.5 1004.3 992.3 Yields & Margins (%)
Taxes 770.0 966.9 1044.6 1274.0 Yield on avg earning assets 10.6 10.4 9.5 9.6
Net Profit 1502.4 1866.1 2120.8 2586.5 Avg. cost on funds 6.9 6.8 6.3 6.1
growth (%) 10.4 24.2 13.6 22.0 Net Interest Margins 4.5 4.5 3.9 4.0
EPS 19.5 12.1 11.7 14.2 Avg. Cost of Deposits 6.9 6.7 6.1 6.1
Source: Company, ICICIdirect.com Research Yield on average advances 13.2 12.5 11.3 11.5
Quality and Efficiency (%)
Cost / Total net income 49.7 52.1 57.1 56.6
Credit/Deposit ratio 89.8 88.4 86.6 85.1
GNPA 2.0 1.9 2.4 2.4
NNPA 1.1 0.9 1.0 1.0
ROE 13.8 14.1 9.3 10.3
ROA 1.8 1.9 1.1 1.2
Source: Company, ICICIdirect.com Research

Balance sheet | Crore Growth ratios

(Year-end March) FY14 FY15 FY16E FY17E (Year-end March) FY14 FY15 FY16E FY16E
Sources of Funds Total assets 4.6 21.0 84.3 17.0
Capital 385.2 386.2 454.2 454.2 Advances 9.4 24.8 83.2 16.3
ESOPS 8.5 3.0 8.5 8.5 Deposits 15.8 26.7 86.9 18.4
Reserves and Surplus 11889.9 13722.6 23415.9 26027.1 Total Income 10.5 15.6 66.4 13.9
Networth 12283.5 14111.8 23878.5 26489.7 Net interest income 16.0 13.5 64.7 14.4
Deposits 59072.3 74860.4 139879.8 165660.9 Operating expenses 15.1 28.0 70.5 13.9
Borrowings 12895.6 12149.8 23777.2 28092.7 Operating profit 30.7 16.3 39.1 16.4
Other Liabilities & Provisions 3333.8 4858.1 7832.0 8335.7 Net profit 10.4 24.2 13.6 22.0
Total 87585.2 105980.0 195367.6 228579.1 Book value 29.9 14.9 43.9 10.9
EPS 7.0 -38.1 -3.4 22.0
Applications of Funds Source: Company, ICICIdirect.com Research
Fixed Assets 1106.9 1206.7 1917.7 2062.0
Investments 25484.5 30422.1 53205.8 58918.7
Advances 53027.5 66160.5 121188.7 140996.2
Other Assets 1972.3 1928.4 7060.5 12991.1
Cash with RBI & call money 5979.9 6262.4 11994.9 13611.1
Total 87571.1 105980.0 195367.6 228579.1
Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 12

ICICIdirect.com coverage universe (Banks)
CMP M Cap EPS (|) P/E (x) P/ABV (x) RoA (%) RoE (%)
Sector / Company (|) TP(|) Rating (| Cr) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E
Bank of India (BANIND) 94 116 Sell 7,422 26 -3 16 3.6 NA 5.7 0.4 0.7 0.6 0.3 0.0 0.2 6 -1 4
Bank of Baroda (BANBAR) 127 172 Hold 29,415 15 16 20 8.3 8.1 6.4 0.9 1.0 0.8 0.5 0.5 0.5 9 9 10
Punjab National Bank (PUNBAN) 93 130 Hold 16,800 17 18 25 5.6 5.3 3.7 0.8 0.7 0.6 0.5 0.5 0.7 8 8 11
State Bank of India (STABAN) 185 300 Buy 137,855 18 19 22 10.5 9.9 8.6 1.4 1.2 1.1 0.7 0.7 0.7 11 10 11
Indian Bank (INDIBA) 91 184 Buy 3,903 21 23 29 4.3 4.0 3.1 0.4 0.4 0.4 0.5 0.5 0.6 7 7 9
Axis Bank (AXIBAN) 389 600 Buy 92,461 31 35 42 12.5 11.2 9.3 2.1 1.8 1.5 1.7 1.7 1.7 18 17 17
City Union Bank (CITUNI) 81 105 Buy 4,818 6 7 8 12.5 11.3 9.9 2.0 1.7 1.5 1.4 1.4 1.5 16 15 15
DCB Bank (DCB) 74 72 Hold 1,917 7 6 7 10.9 11.7 10.5 1.5 1.3 1.2 1.3 1.0 1.0 15 11 11
Federal Bank (FEDBAN) 49 45 Sell 8,349 6 5 5 8.3 10.3 9.0 1.1 1.1 1.0 1.3 0.9 0.9 14 10 11
HDFC Bank (HDFBAN) 1,028 1,220 Buy 256,875 41 49 61 25.2 20.9 16.8 4.2 3.6 3.1 1.9 1.9 1.9 19 18 19
IndusInd Bank (INDBA) 898 1,000 Hold 52,312 34 39 50 26.5 22.8 18.1 4.6 3.0 2.7 1.8 1.9 2.0 18 16 15
Jammu & Kashmir Bk(JAMKAS) 69 95 Hold 3,345 10 17 21 6.6 4.0 3.3 0.7 0.6 0.6 0.7 1.0 1.1 9 13 14
Kotak Mahindra Bank (KOTMAH) 670 677 Hold 122,481 14 12 14 49.1 57.3 47.0 5.8 5.4 4.9 1.5 1.1 1.2 12 9 10
South Indian Bank (SOUIN0) 18 23 Hold 2,475 2 3 3 8.0 6.8 5.8 0.8 0.8 0.7 0.5 0.6 0.6 9 10 11
Yes Bank (YESBAN) 673 850 Buy 28,196 48 57 67 14.0 11.8 10.1 2.4 2.1 1.8 1.6 1.6 1.6 21 19 19

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 13

RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns

ratings to its stocks according to their notional target price vs. current market price and then categorises
them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the
notional target price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;

Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com

ICICIdirect.com Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No. 7, MIDC,
Andheri (East)
Mumbai 400 093

research@icicidirect.com

ICICI Securities Ltd | Retail Equity Research Page 14

ANALYST CERTIFICATION
We /I, Kajal Gandhi, CA, Vasant Lohiya, CA and Vishal Narnolia, MBA Research Analysts, authors and the names 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)
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ICICI Securities Ltd | Retail Equity Research Page 15