Kotak Mahindra Bank Strong fundamentals, Positive performance

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3R MATRIX + = - Summary Š Kotak Mahindra Bank (KMB) posted positive results for Q4FY2021, where while the Right Sector (RS) ü core operational performance was largely in-line, asset-quality performance was positive. Right Quality (RQ) ü Š Asset quality improved as KMB saw sequentially lower GNPA/NNPAs for Q4FY2021 at 3.25%/1.21% in Q4FY2021 as compared to 3.27%/1.24% levels in Q3FY2021 Right Valuation (RV) ü (proforma basis), with a q-o-q decline in SMA-2 accounts. Š The bank’s management commentary was positive, which is encouraging. KMB is + Positive = Neutral - Negative well capitalised, with low drag from NPAs and strong leadership, which we believe allows the right mix to the bank. What has changed in 3R MATRIX Š We maintain Buy on the stock with our SOTP-based PT of Rs. 2,130. Old New Kotak Mahindra Bank (KMB) posted positive results for Q4FY2021. The bank’s core operational performance was largely inline. Asset-quality performance enthused for the RS  quarter. NII came at Rs. 3,842 crore, up 8% y-o-y and nearly flat on a q-o-q comparison, which was below expectations. PPOP stood at Rs. 3,407 crore, up 25% y-o-y and 17.4% q-o-q, which RQ  was mainly helped by strong other income growth as the bank saw fee income to grow to Rs. 1,378 crore for Q4FY2021, up 8.5% y-o-y but up by ~23% q-o-q. Due to higher provisions, RV  PAT came at Rs. 1682.4 crore, up 32.8% y-o-y but down 8% q-o-q. Asset quality improved as KMB saw sequentially lower GNPA/NNPAs for Q4FY2021 at 3.25%/1.21% as compared Reco/View Change to 3.27%/1.24% levels in Q3FY2021 (proforma basis). The Special Mention Accounts (SMA2) outstanding stand at Rs. 110 crore (5 bps of Net Advances), improving from Rs. 654 crore (31 Reco: Buy  bps of net advances), which not only improved significantly on a q-o-q basis but are also at very manageable levels. Total restructuring implemented has been only Rs. 435 crore CMP: Rs. 1,724 (0.19% of net advances), which is insignificant. Credit cost excluding COVID-19 provisioning Price Target: Rs. 2,130  for FY2021 stood at 84 bps of net advances. The bank did not dip into its COVID-19 provision (of Rs. 1,279 crore) during Q4FY2021. Total provisions (including specific, standard, COVID-19 á Upgrade  Maintain â Downgrade related, etc.) held as of March 31, 2021, are Rs. 7,021 crore, which is 95% of GNPA and, hence, provide a cushion against asset-quality surprise. Strength in the liability profile indicates Company details that the margin outlook is likely to be stable (with a positive bias) for the medium term. Management commentary is more positive on growth, which is encouraging. The bank is Market cap: Rs. 3,41,728 cr well capitalised, with low drag from NPAs and strong leadership, which we believe allows 52-week high/low: Rs. 2,049 / 1,110 the right mix to the bank. The bank has strong capitalisation, low-cost liability base, and has ample dry powder to rev up growth as and when the situation normalises. We maintain Buy NSE volume: on the stock with our SOTP-based price target (PT) of Rs. 2,130. 50.4 lakh (No of shares) Key positives BSE code: 500247 Š Reported GNPA/NNPA at 3.25%/1.21%, down from (proforma) GNPA/NNPA of 3.27%/1.24% in December 2020. NSE code: KOTAKBANK Š During Q2FY2020, the bank’s CASA ratio improved to 60.4% (of total deposits) from 58.9% Free float: (increasing by 150 bps sequentially), taking it to the best-ever CASA ratio yet again. 146.5 cr (No of shares) Key negatives Š Slow advances growth, with advances growing tepidly by 1.8% y-o-y and 4.5% q-o-q to Rs. Shareholding (%) 223,689 crore. Our Call Promoters 26.0 We value KMB on a standalone basis at ~4.5x its FY2023E book value and its subsidiaries at FII 48.9 ~Rs. 490 per share. The bank’s strong operating metrics, prudent and agile leadership team, well-capitalised balance sheet, as well as quality of its subsidiaries (formidable players in their DII 12.9 own segments) provide long-term value to franchises. The stock is available at 4.8x/4.3x its FY2022E/FY2023E BVPS. With the recent QIP and capital issue, the bank is placed comfortably Others 12.2 with tier-1 capital of 23.6% (standalone) and has the wherewithal for capitalising on opportunities. We recommend Buy on the stock with an SOTP-based PT of Rs. 2,130. Price chart Key Risks 2200 Any delay in economic pickup may elongate the recovery trajectory, resulting in consequent 1900 rise in risk of NPAs affecting profitability.

1600 Valuation Rs cr Particulars FY19 FY20 FY21 FY22E FY23E 1300 NII 11,259 13,500 15,340 17,417 20,439 1000 PPoP 8,348 10,021 12,215 12,621 14,834 21 20 20 20 - - - - Apr Sep PAT 4,865 5,947 6,965 8,319 9,660 Dec May EPS (Rs.) 25.5 30.9 36.6 43.7 50.7 Price performance BVPS (Rs.) 224.7 256.2 334.6 373.6 422.3 (%) 1m 3m 6m 12m PE (x) 67.6 55.8 47.1 39.5 34.0 Absolute -2.0 -5.6 13.4 41.8 PBV (x) 7.7 6.7 5.2 4.6 4.1 Relative to RoE (%) 11.3 12.1 10.9 11.7 12.0 -1.1 -2.6 -10.2 -15.0 Sensex RoA (%) 1.6 1.7 1.7 1.7 1.7 Sharekhan Research, Bloomberg Source: Company; Sharekhan estimates

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Concall Key Highlights Š COVID-19 update: The bank has witnessed the loss of many lives and, hence, it has taken the call to save the lives of each employee. Management has decided that for the next one week, no person will venture out of home unless legally required to step out. Branches are expected to work with three out of normally 8-10 employee strength. Š Management strategy going forward: View is that proper underwriting and right segment will be continue to be the focus areas. Segments where KMB had earlier been cautious have served the bank well. Š Unsecured book: Total unsecured retail lending, which was 7.5% in FY2020, is now 5.8% in FY2021 of the total balance sheet. The bank is ready to grow in these segments and hopes the COVID-19 curve will come down in June-July 2021. Š RBI regulation on leadership transition: The bank has time till December 2023. The bank and the board are well aware and would like to assure that the bank will be taking steps to ensure continuity in shareholder value and business. Promoters are committed to maintain their stake in the bank. Š Low-cost liability franchise: Healthy low-cost liability base allows the bank to do more of the cards business as well as mortgage business, which will help the bank offer not only healthy returns but will also be acting as future channels for business growth. Š Growth outlook: The bank is looking to grow and does not see its strategy too much changing due to COVID-19 resurgence. That said, the bank is considering all probabilities and possibilities in its strategy to chart out an optimal course. Š Business mix: The mix at this stage shows that there has been a larger proportion of secured loans for KMB. The bank sees opportunities to gain market share in the secured business. Management has also been seeing opportunities in unsecured book too, but growth there will be backed by its conservative underwriting. The bank does not see long-term structural risk to growth from the pandemic, but medium- term challenges will persist. Š Slippages: Slippages were Rs. 5,400 crore for FY2021 and was Rs. 3,400 crore for FY2020. In H2FY2021, slippages were Rs. 4,400 crore. Š Write-offs were H2FY2021 at Rs. 530 crore. Write-offs include treasury MTM and security receipts (SRs). Š Stress: Bulk of the credit cost has come in Q4, since moratorium period weaker accounts have became NPAs Q3FY2021. However, the bank has aggressively provided (between 90-180 days of falling overdue), which resulted in higher credit cost in Q4FY2021. For Q3FY2021 provision for advances stood at Rs. 461 crore, which came higher in Q4 FY2021 at around Rs. 700 crore. Having capital on book is positive, and restructuring of loans needs to be based on account requirement instead of external reasons such as regulatory dispensation etc. Š ECLGS book has done well. Since the incremental part is guaranteed by Government of India (GOI) and, hence, the bank has confidence on the book. Š Leadership transition plans: Both Mr. Deepak Gupta and Uday Kotak’s current tenure is till December 2023. The bank believes it has ample time and will be able to chart out the succession plan before the time frame ends. Š Profitability of mortgage product: Mortgage rates may be low and margin dilutive but KMB has its own strengths, which make it believe that the mortgage business will be margin accretive and value addition for KMB. The bank sees mortgage business is the entry product for customer relations. Š Low-cost liability is key: COVID-19 has transformed the form and proposition for customers. Continued improvement in cost of funds will be able to build a long-term mortgage product base. The bank has a medium-term to long-term perspective for mortgage business. Š Customer additions run-rate: Adding around 5 lakh new customers every month.

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Š Pricing pressures were there in Q4 and there were also due to the priority sector loans (PSLC) costs. Hence, the bank is looking at long-term sustainable profitability. Hence, the bank is focused on risk adjusted return of capital. Management has to make sure that the bank gets to maintain ROE and profit growth. Š Corporate franchise has varied streams and is unique compared to peers. The bank is creating real value-added segment for the long term. However, compared to mortgages, the mortgages provided an introduction to new customers.

Results (Standalone) Rs cr Particulars Q4FY21 Q4FY20 Y-o-Y % Q3FY21 Q-o-Q % Interest Earned 6448.9 6804.7 -5.2 6659.3 -3.2 Interest Expense 2606.1 3245.0 -19.7 2783.7 -6.4 Net Interest income 3842.8 3559.7 8.0 3875.6 -0.8 Other Income 1949.5 1489.4 30.9 1285.2 51.7 Net Operating Income 5792.3 5049.0 14.7 5160.8 12.2 Operating Expenses 2384.9 2323.8 2.6 2257.9 5.6 - Employee cost 868.9 969.6 -10.4 959.3 -9.4 - Other costs 1516.0 1354.2 11.9 1298.6 16.7 Operating Profit 3407.5 2725.3 25.0 2902.9 17.4 Provisions for Contingencies 1179.4 1047.5 12.6 418.6 181.8 PBT 2228.1 1677.8 32.8 2484.3 -10.3 TAX 545.7 411.2 32.7 630.8 -13.5 PAT 1682.4 1266.6 32.8 1853.5 -9.2 Source: Company; Sharekhan Research

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Outlook and Valuation n Sector View – Credit growth yet to pick up, private banks placed better System-level credit offtake, which is still subdued, is now improving, with credit growth of over 6% in the latest fortnight. On the other hand, deposits rose by ~12%, which indicates a healthier economic scenario. Moreover, the accommodative stance of the Reserve Bank of India (RBI), resulting in surplus liquidity, provides succour in terms of easy availability of funds and lower cost of funds for banks and financials. The end of the loan moratorium is a relief. Going forward, CE is likely to be a function of book quality, client profile, as well as economic pickup. At present, we believe the banking sector is likely to see increased risk-off behaviour, with tactical market share gains for well-placed players. We believe private banks, with improved capitalisation and strong asset quality (with high coverage and provisions buffers), are structurally better placed to take-off once the situation normalises. n Company outlook – With strong fundamentals, KMB stands tall We believe with KMB’s strong retail position along with mass-affluent customer base, the bank is likely to see lesser asset-quality issues from the retail segment, and its strategy of frontloading of provisions and recognitions has resulted in improving the NPL position on a sequential basis. The bank is entering FY2022E with a relatively clean/ normalised book quality. KMB has one of the highest CASA ratio in the industry (60+% as on March 2021), which has helped the bank in reducing cost of funds, which will enable it to grow its business in a risk calibrated manner. Current capitalisation, along with provision coverage, indicate a long runway for growth for the bank. KMB has a diversified and integrated financial service offering that helps it balance against market cycles, hedge against downturns in specific segments, and access multiple growth avenues. The broad product spectrum helps meet customers’ diverse financial and investment requirements, thus enhancing overall customer experience. We believe its strength in the liability side, along with strong book quality and robust capital position provide it with strong fundamentals. n Valuation – Maintain Buy with an SOTP-based PT of Rs. 2,130. We value KMB on a standalone basis at ~4.5x its FY2023E book value and its subsidiaries at ~Rs. 490 per share. The stock has corrected by ~16% from its recent highs and we believe risk reward is favourable for long-term investors. The bank’s strong operating metrics, prudent and agile leadership team, well-capitalised balance sheet, as well as quality of its subsidiaries (formidable players in their own segments) provide long-term value to franchises. The stock is available at 4.8x/4.3x its FY2022E/FY2023E BVPS. The bank is placed comfortably with tier-1 capital of 21.4% (standalone) and has the wherewithal for capitalising on opportunities. We maintain Buy on the stock with an SOTP-based PT of Rs. 2,130.

One-year forward P/BV (x) band 8.00

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0.00 18 19 19 19 20 20 20 21 21 19 20 18 18 21 19 19 20 20 18 18 19 19 18 20 20 19 20 18 19 19 18 20 20 19 21 21 20 ------1.00 - Jul Jul Jul Jan Jan Jan Jun - Jun - Jun - Oct Oct Oct Apr Apr Apr Sep Feb Sep Feb Sep Feb Dec Dec Dec Aug Aug Aug Nov Nov Nov Mar Mar Mar May May May May -2.00 Series3 -1 sd -1 sd 3-yr Avg Source: Bloomberg, Sharekhan Research

Peer Comparison CMP P/BV(x) P/E(x) RoA (%) RoE (%) Particulars Rs/Share FY22E FY23E FY22E FY23E FY22E FY23E FY22E FY23E Kotak Mahindra Bank 1,724.0 4.6 4.1 40.5 34.9 1.7 1.7 11.4 11.8 ICICI Bank 597 2.5 2.2 20.3 16.4 1.3 1.4 12.7 14.0 HDFC Bank 1413 3.4 3.0 19.9 17.8 2.0 1.9 18.2 17.8 Axis Bank 703 2.0 1.8 21.1 19.8 0.8 0.7 9.5 9.4 Source: Company, Sharekhan Research

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About company Established in 1985, Kotak Mahindra Group (Group) is one of India’s leading financial services conglomerate. KMB has a national footprint of 1,600 branches and 2,573 ATMs. The Group offers a wide range of financial services that include commercial banking, stock broking, mutual funds, insurance, and investment banking. The Group caters to diverse financial needs of both individuals and the corporate sector. The bank has a well- diversified pan-India (~30% each in North, West and South regions and 8% in Eastern India) and has one of the highest CASA ratios in the Industry.

Investment theme We believe KMB continues to be an attractive business franchise, with a well-rounded products and services offering, shaping up well for the long term. Consistent performance across interest rate and asset cycles is a key differentiator and indicates the management’s quality and strength of the franchise. The bank’s subsidiaries are shaping up well; and while at present, they are relatively small, we believe each one has strong business strengths and are well on way to be a significant value contributor to the consolidated business in the long term. We find KMB to be an attractive franchisee with a strong balance sheet, with pan- India reach and healthy capitalisation, which will help it tide over medium-term challenges.

Key Risks Any delay in economic pickup may elongate the recovery trajectory, resulting in consequent rise in risk of NPAs affecting profitability.

Additional Data

Key management personnel Mr. U. Kotak Executive Vice Chairman and Managing Director Mr. D. Gupta Joint Managing Director Ms. S. Ekambaram Country Head - Consumer Banking Mr. K.V.S. Manian Country Head - Wholesale & Investment Banking Mr. D Kannan Country Head - Commercial Banking Source: Company Website

Top 10 shareholders Sr. No. Holder Name Holding (%) 1 CANADA PENSION PLAN INVESTMENT BOARD 6.37 2 EUROPACIFIC GROWTH FUND 4.99 3 LIFE INSURANCE CORPORATION OF INDIA 3.76 4 OPPENHEIMER DEVELOPING MARKETS FUND 3.39 5 CAPITAL WORLD GROWTH AND INCOME FUND 2.56 6 SBI MUTUAL FUND 2.31 7 NEW WORLD FUND INC 1.96 8 AXIS MUTUAL FUND 1.78 9 Sumitomo Mitsui Financial Group In 1.66 10 JPMorgan Chase & Co 1.59 Source: Bloomberg

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May 03, 2021 5 Understanding the Sharekhan 3R Matrix Right Sector Positive Strong industry fundamentals (favorable demand-supply scenario, consistent industry growth), increasing investments, higher entry barrier, and favorable government policies Neutral Stagnancy in the industry growth due to macro factors and lower incremental investments by Government/private companies Negative Unable to recover from low in the stable economic environment, adverse government policies affecting the business fundamentals and global challenges (currency headwinds and unfavorable policies implemented by global industrial institutions) and any significant increase in commodity prices affecting profitability. Right Quality Positive Sector leader, Strong management bandwidth, Strong financial track-record, Healthy Balance sheet/cash flows, differentiated product/service portfolio and Good corporate governance. Neutral Macro slowdown affecting near term growth profile, Untoward events such as natural calamities resulting in near term uncertainty, Company specific events such as factory shutdown, lack of positive triggers/events in near term, raw material price movement turning unfavourable Negative Weakening growth trend led by led by external/internal factors, reshuffling of key management personal, questionable corporate governance, high commodity prices/weak realisation environment resulting in margin pressure and detoriating balance sheet Right Valuation Positive Strong earnings growth expectation and improving return ratios but valuations are trading at discount to industry leaders/historical average multiples, Expansion in valuation multiple due to expected outperformance amongst its peers and Industry up-cycle with conducive business environment. Neutral Trading at par to historical valuations and having limited scope of expansion in valuation multiples. Negative Trading at premium valuations but earnings outlook are weak; Emergence of roadblocks such as corporate governance issue, adverse government policies and bleak global macro environment etc warranting for lower than historical valuation multiple. Source: Sharekhan Research Know more about our products and services

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