2QFY20 Results: Kotak Mahindra Bank, Axis Bank, AU Small Finance Bank, RBL Bank

Titan Company Limited Q2 FY’19 Earnings Conference Call
  1. KOTAK MAHINDRA BANK: Growth moderates reflecting challenging macro; earnings outlook stable

–      KMB reported 2QFY20 standalone PAT of INR17.2b (+51% YoY, 12% beat), supported by a lower tax outgo of INR3.7b (our estimate: INR5.7b), while PBT was in line with 21% YoY growth. Consol. PAT stood at INR24.1b (+38% YoY). For 1HFY20, standalone PPoP/PAT was up 19%/42% YoY to INR49.1b/INR30.8b.

–      NII grew 25% YoY to INR33.5b (in-line), led by healthy margins of 4.6% (+12bp QoQ). Other income growth moderated to 1.6% YoY (at INR12.2b).

–      Loan book grew 15% YoY to INR2.1t (v/s 17.6% YoY in 1QFY20), reflecting the slowdown in business banking/corporate banking and CV/CE portfolios. Excluding corporate/business banking, loan growth stood at 21% YoY.

–      Deposit growth moderated to 13% YoY (at INR2.3t), led by a 6% QoQ decline in term deposits. However, average SA deposits grew 20% YoY, while average CA increased 22% YoY. Thus, CASA mix improved to 53.6% (50.7% in 1QFY20). Cost of SA stood at 5.37%, implying ~15bp QoQ improvement.

–      Asset quality deteriorated, with GNPL/NNPL increasing 9%/19% QoQ, led by slippages of INR10b. GNPA/NNPA ratios increased 13bp/12bp QoQ to 2.3%/0.9%. PCR ratio declined 295bp QoQ to 64%. SMA-2 advances stood at INR4.3b (20bp of loans v/s ~15bp in 1QFY20).

–      Other highlights: (a) KMB reported a tier-1 ratio of 17.6% (+30bp QoQ). (b) Opex growth came in at 15% YoY (~1% QoQ decline) to INR20.7b. Thus, the C/I ratio improved ~125bp QoQ to 45.2%. (c) Amongst subs, Kotak Securities and AMC business’ PAT increased 33% and 63% YoY, respectively, while KMCC reported an earnings decline of 93% YoY.

–      Valuation view: KMB’s operating performance remains strong, although business growth has moderated owing to weaker trends in corporate banking and business banking and CV/CE portfolios. We marginally lower our loan growth assumption and estimate KMB to deliver 17%/27% loan book/PAT CAGR over FY19-21, led by stable margins and a further improvement in operating leverage. We continue believing in KMB’s capability to deliver in a challenging environment and appreciate the progress the bank is making in building a strong liability franchise. Maintain Neutral with a target price of INR1,600 (4.0x FY21E ABV + INR475 for subs).

  1. AXIS BANK: Higher provisioning/DTA reversal drive losses, cutting estimates by 7%

–      AXSB reported a net loss of INR1.1b (our estimate: PAT of INR541m) due to a one-time DTA reversal of INR21.4b and elevated provisions. PBT increased 108% YoY to INR24.3b (our estimate: INR27.1b). For 1HFY20, PPoP grew 40% YoY to INR118.4b, while PAT declined 16% YoY to INR12.6b.

–      NII increased 17% YoY to INR61b (in-line) as the margin expanded ~10bp QoQ to 3.5%. Other income grew 45% YoY to INR38.9b, led by treasury gains of INR8.1b and strong traction in retail fee (+16% YoY).

–      Operating expenses were up 6% YoY, trailing total income growth. As a result, PPoP increased 45% YoY to INR59.5b (our estimate: INR54.9b).

–      Loan growth stood at 14.4% YoY to INR5.2t. Domestic loans grew at 19% YoY, led by 23% YoY growth in retail loans, while the overseas book declined 25% YoY. Deposits increased 22% YoY, led by 37% YoY growth in TD deposits. Daily average CASA declined to 39% (flat at 41% on a period-end basis).

–      Fresh slippages increased to INR49.8b, of which corporate slippages stood at INR28.6b (97% from watch-list), though higher write-offs (INR31b) facilitated a 1% QoQ decline in GNPA. GNPA/NNPA ratio declined ~20bp/5bp QoQ to 5.0%/2.0%, while calculated PCR declined 80bp QoQ to 61.7% (79% incl. TWO). BB & below pool reduced to INR62.9b from INR75b in 1QFY20 and equates to 3.4% of corporate loans.

–      Other highlights: (a) Non-funded exposure to NPA/BB was at INR25b/INR22b. (b) CET-1 improved to 14.0%, aided by capital raise. (c) AXSB holds total contingent provisions of INR26b.

–      Valuation and view: AXSB has delivered an in-line operating performance, excluding the impact from DTA reversal. The challenging economic environment, however, kept slippages elevated, with BB & below pool driving most of the corporate slippages. We expect NPL formation to stay elevated as AXSB addresses the remaining stressed assets on the balance sheet, while further rating downgrades owing to the challenging environment can pose a risk to expected normalization in earnings. We cut FY20/21E earnings by 7% each and estimate AXSB to deliver RoA/RoE of 1.3%/14% in FY21. Maintain Buy with a target price of INR825 (2.4x FY21E ABV).

  1. AU SMALL FINANCE BANK: Strong overall performance; return ratios improving steadily

–       PAT increased 88% YoY to INR1.7b (v/s our est. of INR1.3b) aided by higher NII growth, other income and lower opex. Provisions were higher at INR610m as the bank created excess standard asset provision of INR390m. As a result, PCR shored up to 43.9%. For 1HFY20, PPoP/PAT grew 74%/115% to INR5.7b/INR3.6b.

–       NII increased 41% YoY to INR4.5b (8% beat) led by advances growth of 37% YoY and NIM expansion of 20bp QoQ to 5.2%. Operating expenses growth at 21% YoY trailed total income growth of 36% YoY, resulting in 570bp QoQ improvement in CI ratio to 53.9% (adjusted for stake sale gain in 1QFY20). PPoP grew 59% YoY to INR2.8b (v/s our est. of INR2.2b).

–       Gross AUM increased 38% YoY to INR279b led by 44%/14% YoY growth in the retail/wholesale book. Within the retail book, Wheels/ Secured MSME book grew 34%/53% YoY and formed 41%/34% of the overall AUM. Retail AUM forms 79% of the total AUM v/s 76% in 2QFY19.

–       Deposits grew 72% YoY to INR221.1b led by 116% YoY growth in time deposits. Bank is focusing on improving the granularity of its CASA deposits and shore up time deposits as the rate differential between SA and TD has narrowed. TDs form 84% of the total deposits (excluding CDs) v/s 74% in 2QFY19.

–       Fresh slippages at INR1.4b (3.1% annualized) led to 3.7% QoQ increase in absolute GNPL while higher provisions resulted in 2.1% QoQ decline in NNPL. GNPL/NNPL ratio, thus, declined by 7bp/11bp QoQ to 2.01%/1.14%. As a result, PCR improved by 336bp QoQ to 43.9%.

–       Other Highlights: (1) CAR stands at 17.9%, (2) AUM IRR improved to 14.7% with both retail /wholesale AUM IRR each showing 10bp QoQ improvement to 15.1% /12.8%, respectively.

–       Valuation and view: AUBANK is swiftly increasing its focus toward high-yielding used vehicle segment and is capitalizing on under-penetrated opportunities in the MSME segment, thereby sustaining healthy growth momentum. Further, the granular loan portfolio, lower LTVs and higher provisions this quarter should enable the bank to maintain strong control on credit costs. We upgrade our PAT estimates by ~13%/~5% for FY20E/FY21E. We, thus, expect AUBANK to deliver steady 56% earnings CAGR over FY19-21, aided by gradual improvement in operating leverage and margins. Maintain Buy with PT of INR800 (4.6x FY21E BV).

  1. RBL BANK: Asset quality deteriorates; spike in credit cost dents earnings

–       2QFY20 PAT was down 73% YoY to INR543m led by increased provisions of INR5.3b (+150% QoQ); the bank had made provisions of INR3.5b toward identified stressed accounts. For 1HFY20, PPOP was up 42% YoY to INR12.5b while PAT declined 19% YoY to INR3.2b.

–       GNPL/NNPL increased 95%/145% QoQ to INR15.4b/INR9.1b led by elevated slippages of INR13.8b. The bank disclosed stressed pool of INR18b (earlier guided at INR9-10b), which includes four groups (a group based in the East, a diversified media group, a coffee group based in the South and a plastics group based in the West + a buffer), of which INR8b has slipped during the quarter while the remaining would be recognized in subsequent quarters.

–       NII grew 46% YoY to INR8.7b, led by 4bp QoQ expansion in the margin to 4.35%. Core fee income moderated at 19% YoY (5% QoQ decline) to INR3.9b driven by moderation in loan growth.

–       Loan book moderated to 27% YoY led by slowdown in the wholesale book, which grew 12% YoY while strong growth in the retail book continued (+62% YoY). The share of non-wholesale book increased by 190bp QoQ to ~48%. Deposit base increased 31% YoY led by robust 68% YoY increase in SA deposits. CASA ratio increased to 26.5% (+70bp QoQ).

–       Other highlights: (i) Tier-1 ratio remains flat QoQ at 11.3%, (ii) MFI book increased ~4% QoQ to INR51.5b (8.8% of total loans), (iii) Cards portfolio grew to 2.3m (2.0m in 1QFY20), while credit card book grew 122% YoY to INR80b (13.7% of total loans).

–       Valuation view: RBK’s exposure to the stressed exposures has increased further while coverage ratio has declined sharply. Management has guided for elevated slippages from the stressed pool over the coming quarters before normalization of earnings. However, the sluggish economic environment and RBK’s chunky exposure to BBB/BB & below pool remains a concern. Strong growth in the retail business was led by cards/MFI and the robust margins do provide some cushion to its operating performance. But higher slippages and in turn, higher credit cost drives a sharp cut in our FY20/FY21 estimates. We, thus, estimate FY20 PAT to decline 20% YoY before earnings begin to normalize in FY21. Capital raise in 2HFY20 is critical for supporting growth and shoring up Tier-1 ratio. We revise our TP to INR350 (1.6x FY21E BV). Maintain Buy.

(Report by Motilal Oswal Institutional Equities)