Lofty valuations factor in key positives for risk conscious Kotak Bank: Analysts

NEW DELHI: ‘s March quarter earnings missed analysts’ estimates on the profit front led by lower-than-expected growth in net interest income (NII) and higher provisions. Analysts say the private lender has been risk conscious for a while, which has taken a toll on its growth.

Analysts believe the stock will closely track growth momentum, which otherwise has been disappointing, and are ‘neutral’ on the stock as they see better risk reward elsewhere.

HDFC Securities Institutional Research said the prevailing lofty valuations factor in an uptick in credit, cost of funds tailwinds, and normalising credit costs in FY22. It maintained a ‘reduce’ rating on the stock with a target of Rs 1,747.

CLSA has maintained ‘underperform’ on the stock while suggesting that expectations from the bank are still high. The bank, it said, made higher provisioning in the March quarter, but noted that asset quality remained strong for the lender throughout the pandemic. It sees better risk reward in ICICI Bank and Axis Bank.

Another brokerage Credit Suisse has a ‘neutral’ rating on the stock with a target of Rs 1,680. Growth picked up, so did credit cost, it said.

“The management communicated that it has shifted its strategy towards accelerated asset accretion. Execution on this front will be monitored closely, as will be the possibility of inorganic growth,” said Edelweiss Securities.

This brokerage said that there are early signs of acceleration with 4.5 per cent sequential advances growth, but the trend needs to be sustained for the stock to maintain premium valuations.

On Tuesday, the scrip was quoting 0.3 per cent higher at Rs 1,729.85 on BSE.

Antique Stock Broking said Kotak’s FY21 asset quality performance is largely in line with top three private banks. It said that while the standalone earnings for the March quarter have seen a downgrade of 5 per cent in FY22 and 4 per cent in FY23 EPS estimates, better subsidiaries performance kept consolidated earnings largely unchanged.

This brokerage has retained its ‘hold’ rating on the stock with a price target of Rs 1,840 from Rs 1,850, as it stayed constructive on business fundamentals despite relatively weaker asset quality performance.

Kotak Bank on Monday reported 2 per cent growth in loans to Rs 2.23 lakh crore for the quarter ended March, reflecting the impact of the conservative approach that the management adopted in the beginning of the Covid-19 pandemic.

Its net profit grew 33 per cent year-on-year to Rs 1,682 crore for the March quarter. Sequentially, the lender’s net profit fell on account of a rise in provisions. NII rose 8 per cent YoY to Rs 3,843 crore for the quarter, which was also below Street’s estimates.

The private sector lender reported a slight improvement in asset quality as its gross non-performing assets ratio stood at 3.25 per cent for the quarter compared with 3.27 per cent in the previous quarter on a proforma basis.

Emkay Global said that the bank remained open to acquisition of asset portfolios, subject to meeting risk-return criteria. Incremental branch expansion will be mainly to garner current account and transactional banking relationships, it said.

“We retain ‘hold’ with a target of Rs 2,000, based on 4 times core P/ABV FY23 and subsidies valuation of Rs 498, given its superior RoAs, reasonable asset quality management and strong capital comfort. That said, incremental stock movement will closely track growth momentum,” Emkay said.