Kotak Mahindra Bank - Spark Capitalmailers.sparkcapital.in/uploads/Banking/KMB Note.pdf ·...

Kotak Mahindra Bank

Downgrade to ‘SELL’

July 2015

Page 2

Kotak Mahindra Bank - Downgrade to ‘SELL’

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Stock Performance (%)

1m 3m 12m

KMB 6% 0% 64%

Sensex 3% -4% 9%

Bankex 6% -1% 26%

Date Jul 13, 2015

Market Data

SENSEX 27661

Nifty 8361

Bloomberg KMB IN

Shares o/s 1,826mn

Market Cap Rs. 1,294bn

52-wk High-Low Rs. 738-424

3m Avg. Vol Rs. 1,439mn

Latest Shareholding (%)

Promoters 33.9

Institutions 39.0

Public 27.1

The upshot of this note is that we believe the market is underestimating the operational challenges of the KMB-VYSB merger

by attaching KMB’s pre-merger high P/ABV multiple to the merged business. Beyond the palpable complementarities of

geographic spread, product/loan book mix and size, we see significant challenges lurking in the form of income impact from

the ING-centric income streams, structurally high cost operating structure, likely employee attrition issues, inept capital

consumption and a probable impairment to asset quality. Downgrade to SELL with a target price of Rs. 597 (valuing the

standalone merged bank at 3x FY17E ABV and subsidiaries at Rs. 168 per share).

Given VYSB’s bloated cost structure, lower yield book (130bps lower than KMB), relatively lower other income to assets,

modest ATM to branch ratio and low ability to price risk (risk adjusted margins lowest in the private sector pack), we believe

revamping RoAs is likely to be a long drawn affair. Crucially, we foresee downside risks to fee income, asset quality and the

CA franchise. Our base case estimates indicate a slow uptick in RoA to 1.7% by FY18, still 20bps lower than KMB’s

standalone RoA in FY15.

Key Thoughts:

• Average employee costs for VYSB are ~14% higher than KMB, leaving open the likelihood of large scale attrition if KMB chooses to

“normalise” pay scales. ~10% of the workforce of the merged bank are unionised and a potential drag on productivity. Given >50%

cost to income ratios for both VYSB and KMB, we believe the merged bank is likely to average a cost to income ratio of 53% over

FY15-18, with opex to assets at ~3.2%

• VYSB’s CA portfolio is 50% of CASA, the highest in the industry while forex income contributes to 1/4th of fee income. Both fee

income and the liability franchise leverage on the ING Group’s linkages; in addition a Service level agreement (SLA) with ING Bank

NV, renewed every year enables advice from counterparts in ING Bank NV for all exposures over Rs.1.7bn for a single borrower and

over Rs.3.4bn for a borrower group. Our sensitivity analysis suggests as much as a 20bps hit to base case RoA estimates if ING

Group dependent fee and CA were to be negated.

• A branch mix top heavy (62%) on urban and metro locations is a headwind to KMB’s stated SME/agri thrust. In addition, the merged

bank’s ATM to branch ratio at 1.5 will be the lowest amongst new gen peers, entailing significant costs in setting up additional

ATMs/interchange fees.

• VYSB’s FY11-14 RoRWA at ~1.2% has been the lowest in the private sector space, resulting in repeated capital infusions at 24

month intervals. Both KMB and VYSB run >80% RWA/assets thereby implying a RoRWA of 2% for the merged bank – amongst the

lowest in the new gen space. Inefficient pricing of risk as evinced by VYSB’s low risk adjusted NIM of 1.5% and a likely impairment to

asset quality consequent to the merger (non-disclosure of VYSB’s 4QFY15 results) are likely to keep credit costs elevated.

ABHINESH VIJAYRAJ [email protected] +91 44 4344 0006

NAVIN BABU E S [email protected] +91 44 4344 0065

NISHANT RUNGTA [email protected] +91 44 4344 0033

YearNII PAT ROE ROA ABV P/ABV

(Rs. mn) (Rs. mn) (%) (%) (Rs.) (x)

FY16E 76,725 28,523 12.4 1.5 126 4.6

FY17E 94,145 37,264 14.2 1.6 145 3.8

FY18E 1,17,286 49,305 16.2 1.7 171 3.1

CMP

Rs. 711

Target

Rs. 597

Rating

SELL

Kotak Mahindra BankRoA revamp likely to be long-drawn

Page 3

We believe the merged bank is likely to see only a slow improvement in NIM & other income counteracting a

likely uptick in costs and provisions. Grey areas on ING’s support and likely asset quality impairment remain

key risks. Our base case estimates suggest a slow pace of RoA improvement with FY17E RoA ~20bps lower

than the standalone KMB in FY15.

RoA and RoE

decomposition

KMB

(Standalone)

FY15

VYSB FY15E

KMB

(Merged)

FY15E

KMB

(Merged)

FY16E

KMB

(Merged)

FY17E

KMB

(Merged)

FY18E

Net Interest Income to

Average Total Assets4.4% 3.0% 3.9% 4.0% 4.1% 4.1%

Other Income to Average

Total Assets2.1% 1.5% 1.8% 1.9% 2.0% 2.0%

Total revenues to Average

Total Assets6.5% 4.5% 5.7% 5.9% 6.1% 6.2%

Operational expenses to

Average Total Assets3.4% 2.6% 3.0% 3.2% 3.3% 3.2%

Provisions to Average

Total Assets1.2% 0.8% 1.1% 1.2% 1.2% 1.2%

Total Costs to Average

Total Assets4.5% 3.4% 4.2% 4.5% 4.5% 4.4%

Return on Assets 1.9% 1.1% 1.5% 1.5% 1.6% 1.7%

Average Equity to Average

Total Assets13.7% 10.0% 12.7% 12.0% 11.3% 10.7%

Return on Equity 14.1% 11.4% 12.2% 12.4% 14.2% 16.2%

Identical cost of liabilities, but widely divergent yield on

advances

Breakup of NIM

KMB

(Standalone)

FY15

VYSB

FY15E

KMB

(Merged)

FY15E

Interest income/ Assets 10.8% 9.8% 10.5%

Yield on advances 12.5% 11.2% 12.0%

Yield on investments 7.9% 8.0% 8.0%

Interest exp/ deposits+borr. 6.9% 6.8% 6.9%

Cost of deposits 6.8% 6.6% 6.7%

Spread 3.9% 3.0% 3.6%

NIM 4.7% 3.3% 4.2%

Similar CIR structures leaves little scope for operating

leverage, VYSB’s avg. employee cost 14% higher than KMB

Cost structures

KMB

(Standalone)

FY15

VYSB

FY15E

KMB

(Merged)

FY15E

Employee/Branch 27 18 23

Avg. employee cost (Rs. Mn) 0.8 0.9 0.8

Cost to Income Ratio (CIR) 55% 56% 56%

VYSB derives a significant proportion of other income through it’s

International Clients and Global Transaction Services groups, both

greatly dependent on the ING Group’s international linkages.

Uncertainly surrounds the level of involvement of the ING group in

the merged bank, a potential risk for other income traction

Uncertainty surrounds the likely impairment in asset quality in

VYSB’s books as a result of the merger.

Asset Quality

KMB

(Standalone)

FY15

VYSB

FY15E

KMB

(Merged)

FY15E

GNPA % 1.9% 1.9% 1.9%

Restructured % 0.2% 1.3% 0.7%

Stressed assets % of networth 9.9% 17.6% 12.6%

Kotak Mahindra BankCost Structures to Remain Elevated

Page 4

… with VYSB employees drawing ~14% higher than KMB

Source: Spark Capital Research

Both VYSB and KMB have consistently run cost to income ratios >50%


Average employee costs for VYSB are ~14% higher than

KMB, leaving open the likelihood of large scale attrition if

KMB chooses to “normalise” pay scales.

~3000 employees or 10% of the workforce of the merged

bank are unionised, a potential drag on

productivity/employee activism.

Since FY09, all the strikes in VYSB barring one have

been industry-level strikes.

The merged bank is likely to average a cost to income

ratio of 53% over FY15-18, with opex to assets at ~3.2%

The merged bank has limited potential for operating leverage…


2.5%

2.8%

2.6%2.5%

2.6%

3.6%3.5%

3.1%

3.0% 3.0%

2.0%

2.2%

2.4%

2.6%

2.8%

3.0%

3.2%

3.4%

3.6%

3.8%

40%

45%

50%

55%

60%

65%

FY10 FY11 FY12 FY13 FY14 FY10 FY11 FY12 FY13 FY14

VYSB KMB

Cost to Income Ratio (%) Opex to Average Assets % (RHS)

3.0%

3.2%

3.3%3.2%

2.9%

3.0%

3.0%

3.1%

3.1%

3.2%

3.2%

3.3%

3.3%

0.40

0.42

0.44

0.46

0.48

0.50

0.52

0.54

0.56

FY15 FY16 FY17 FY18

Cost to Income Ratio (%) Opex to Average Assets % (RHS)

0.690.66

0.86

0.71

0.65

0.750.77

0.70

0.89

0.73

0.90

0.79

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

VYSB KMB

Avg. Employee Cost (Rs.Mn)

FY10 FY11 FY12 FY13 FY14 FY15

Kotak Mahindra Bank

VYSB’s CA proportion at 50% of CASA is the highest in the industry


VYSB derives ~1/4th of other income through forex gains...


... an outcome of large off balance sheet exposures, 4x that of KMB


Service level agreement (SLA) with ING Bank NV, renewed every

year in order to benefit from the intellectual property, expertise and

knowledge of ING Bank NV

Under the terms of the SLA, advice from counterparts in ING Bank

NV obtained for all exposures, that are over 25 million Euros

equivalent for a single borrower and over 50 million Euros equivalent

for one-obligor group.

Advice from ING Bank NV regarding restructuring exposures that are

over 7.5 million Euros.

International clients group set up in FY12, focuses on serving MNCs

with operations in India. This group benefits significantly from ING’s

global network that helps gain access to ING’s core clients with India

business

Global Transaction Services (“GTS”) group focussed on offering cash

management, trade finance and electronic banking, benefits by

growing its current account base.

17% 18% 16%14%

17%

8%6%

50% 48%

37%

30%

39%36%

19%

0%

10%

20%

30%

40%

50%

60%

0%

5%

10%

15%

20%

VYSB KMB HDFCB ICICIBC AXIS KVB FB

CA% CA as % of CASA

219%

150%

261%

222%203%

99%

68% 62%43% 50%

30%

80%

130%

180%

230%

280%

FY10 FY11 FY12 FY13 FY14

VYSB KMB

65% 62%

4% 12%

24% 12%

0%6%

7% 9%

40%

50%

60%

70%

80%

90%

100%

VYSB KMB

Comm, ex, brokerage Profit on sales of inv Forex gain Dividend income Other income

Significant ING Group linkages

Page 5

Kotak Mahindra Bank

Sensitivity of Kotak Mahindra Bank’s Return on Equity (RoE) to change in the fee income & current account (CA) deposits

dependent on ING parent’s business relationships


Sensitivity of Kotak Mahindra Bank’s Return on Assets (RoA) to change in the fee income & current account (CA) deposits

dependent on ING parent’s business relationships


Crystallizing ING Group dependencies

Page 6

RoA Sensitivity

of combined KMB

ING dependent Fee income (% of VYSB fee income)

0% 5% 10% 15% 20% 25% 30% 35% 40%

VY

SB

CA

%

17% 1.54% 1.52% 1.50% 1.48% 1.46% 1.44% 1.42% 1.40% 1.38%

16% 1.53% 1.51% 1.49% 1.47% 1.45% 1.43% 1.41% 1.39% 1.37%

15% 1.51% 1.49% 1.47% 1.45% 1.43% 1.42% 1.40% 1.38% 1.36%

14% 1.49% 1.48% 1.46% 1.44% 1.42% 1.40% 1.38% 1.36% 1.34%

13% 1.48% 1.46% 1.44% 1.42% 1.40% 1.38% 1.36% 1.34% 1.32%

12% 1.46% 1.44% 1.42% 1.40% 1.38% 1.36% 1.34% 1.33% 1.31%

11% 1.44% 1.42% 1.41% 1.39% 1.37% 1.35% 1.33% 1.31% 1.29%

10% 1.43% 1.41% 1.39% 1.37% 1.35% 1.33% 1.31% 1.29% 1.27%

9% 1.41% 1.39% 1.37% 1.35% 1.33% 1.31% 1.29% 1.27% 1.26%

RoE Sensitivity

of combined KMB

ING dependent Fee income (% of VYSB fee income)

0% 5% 10% 15% 20% 25% 30% 35% 40%

VY

SB

CA

%

17% 12.1% 12.0% 11.8% 11.6% 11.5% 11.3% 11.2% 11.0% 10.9%

16% 12.0% 11.9% 11.7% 11.6% 11.4% 11.3% 11.1% 11.0% 10.8%

15% 11.9% 11.8% 11.6% 11.4% 11.3% 11.1% 11.0% 10.8% 10.7%

14% 11.8% 11.6% 11.5% 11.3% 11.2% 11.0% 10.9% 10.7% 10.6%

13% 11.6% 11.5% 11.3% 11.2% 11.0% 10.9% 10.7% 10.6% 10.4%

12% 11.5% 11.4% 11.2% 11.0% 10.9% 10.7% 10.6% 10.4% 10.3%

11% 11.4% 11.2% 11.1% 10.9% 10.8% 10.6% 10.5% 10.3% 10.2%

10% 11.2% 11.1% 10.9% 10.8% 10.6% 10.5% 10.3% 10.2% 10.0%

9% 11.1% 11.0% 10.8% 10.6% 10.5% 10.3% 10.2% 10.0% 9.9%

• Assuming 25% of the erstwhile

ING Vysya Bank’s fee income

being dependent on the parent

ING’s business relationships and

not coming through to the merged

KMB could result in a 10bps fall in

RoAs & 90bps fall in RoEs.

• Similarly, a 6% decline in the

erstwhile ING Vysya Bank’s

current account (CA) deposits

(Zero cost deposits) (assumed

dependency on the parent ING’s

business relationships), not

coming through to the merged

KMB could result in another 10bps

fall in RoAs.

• In a worst case scenario, assuming

both ING dependent CA and other

income streams suffering, we

foresee a 20bps impact to base

case RoA.

Kotak Mahindra BankLoan book complementarity, doesn’t extend to branch mix

Page 7

… the branch mix remains urban/metro centric (62%), a potential headwind to the bank’s SME/agri thrust. Also, the ATM/Branch network of the

combined bank will be the lowest amongst new gen peers at 1.5x, entailing significant costs in additional ATMs/ATM interchange fees


While KMB’s CV&CE, agri and personal loans compliment VYSB’s SME book…


Urban , 31%

Metro, 32%

Semi Urban ,

20%

Rural, 17%

Urban , 18%

Metro, 44%

Semi Urban ,

22%

Rural, 16% Urban ,

24%

Metro, 38%

Semi Urban ,

21%

Rural, 16%

VYSB KMB KMB (merged)


4.8

3.1 2.9 2.6 1.8 1.5 1.2 1.1

- 1.0 2.0 3.0 4.0 5.0 6.0

AX

IS

ICIC

IBC

HD

FC

B

KV

B

KM

B

KM

B (

M)

FB

VY

SB

ATM/Branch Network

ATM/Branch Network

Corporate banking,

31%

CV&CE, 8%Agri, 18%

Business banking

(SME), 10%

Mortgage, 22%

Personal, 9% Others, 2%

Corporate banking,

37%

CV&CE, 1%

Agri, 10%

Business banking (SME), 36%

Mortgage, 14%

Personal, 1%

Others, 1%

Corporate banking,

33%

CV&CE, 5%

Agri, 15%

Business banking (SME), 20%

Mortgage, 19%

Personal, 6%

Others, 1%

Kotak Mahindra Bank

... led by RWA growth consistently outstripping asset growth, resulting

in a bank inefficient on capital consumption


The merged bank drops from a RoRWA of 2.4% to 2%, close to the

bottom amongst peers


Although VYSB’s RoA compares favourably to peers...


... it ranks low on RoRWA...


1.5%

2.3%2.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%


Return on Risk weighted assets (%)


Rs. BnPAT RWA RoRWA

FY15 FY14 FY15 FY15

CUBK 4 136 156 2.7%

HDFCB 102 3,453 4,163 2.7%

KMB 19 661 873 2.4%

IIB 18 673 889 2.3%

YES 20 766 996 2.3%

AXSB 74 2,874 3,603 2.3%

ICICIBC 112 4,986 5,449 2.1%

FB 10 461 513 2.1%

KMB (M) 25 1,130 1,413 2.0%

KVB 5 278 309 1.6%

VYSB 6 469 540 1.2%

1.1%

1.7%1.5%

0.0%

0.5%

1.0%

1.5%

2.0%


Return on Assets (%)


-7%

28% 30%24%

11%

24%

36% 35%

28%

8%

-10%

0%

10%

20%

30%

40%

FY10 FY11 FY12 FY13 FY14 FY10 FY11 FY12 FY13 FY14

VYSB KMB

Risk Weighted Assets

Assets growth % RWA growth % (RHS)

Pace of capital consumption set to accelerate

Page 8

Kotak Mahindra Bank

Return on retained earnings lowest amongst comparable peers


VYSB’s ability to price risk on the decline over the past 3 years…


… leading to risk adjusted margins ranking close to the bottom


Inadequate risk pricing in VYSB an additional red flag

Page 9

• VYSB’s incremental risk adjusted yields and

margins (on a falling trajectory) point to a growing

inability to price risk appropriately.

• VYSB’s RoRE ranks well below larger private peers,

and even a few regional banks, despite frequent

capital raises undertaken by the bank.

• Given the widely disparate risk pricing cultures, we

believe a significant shake up in the loan book

could be executed in the wake of the merger

YoA - slippage FY11 FY12 FY13 FY14 FY15 Weighted. Average

KMB 12.2% 13.9% 13.1% 11.4% 11.4% 12.1%

YES 10.0% 12.0% 12.2% 12.0% 11.7% 11.8%

IIB 11.2% 12.7% 12.9% 11.9% 10.8% 11.8%

HDFCB 9.4% 10.7% 11.0% 10.2% 9.9% 10.3%

VYSB 8.4% 10.2% 11.1% 10.2% 7.5% 9.4%

AXSB 7.0% 8.6% 9.3% 9.0% 8.9% 8.8%

ICICIBC 6.7% 8.0% 8.6% 8.4% 7.5% 8.0%

NIM - slippage FY11 FY12 FY13 FY14 FY15 Weighted. Average

KMB 4.5% 4.3% 3.6% 2.9% 3.5% 3.5%

HDFCB 3.7% 3.7% 3.5% 3.1% 3.3% 3.4%

IIB 2.9% 2.5% 2.4% 2.5% 2.2% 2.4%

YES 2.4% 2.5% 2.3% 2.2% 2.6% 2.4%

AXSB 2.0% 2.0% 2.1% 2.3% 2.4% 2.2%

VYSB 1.8% 2.4% 2.6% 2.3% -0.2% 1.5%

ICICIBC 1.1% 1.3% 1.6% 1.7% 1.0% 1.4%

39%

26%

18%

18%

18%

18%

17%

14%

12%

6%

5%

2%

2%

0%

-2%

-4%

-7%

-8%

-20%

-10%

0%

10%

20%

30%

40%

50%

DC

BB

ICIC

IBC

HD

FC

B

YE

S

IIB

FB

AX

SB

KM

B

CU

BK

VY

SB

SB

IN

SIB

KV

B

JK

BK

BO

B

BO

I

CB

K

PN

B

Return on Retained Earnings

Kotak Mahindra Bank

SOTP Valuation FY17E basis FY15

Basis MultipleMarket Cap.

(Rs.mn)

Value per

share

Net worth

(Rs.mn)

PAT

(Rs.mn)

Return on

Equity (%)Comments

Kotak Prime P-ABV 3 1,34,224 74 33,500 5,074 15%Valuing Prime at 3.0x FY17E adjusted book with RoA

assumed to be 2.57%, and growth of 15% p.a.

Kotak Securities P-E 20 76,594 42 23,840 2,896 12%Kotak securities valued at 20x FY17E earnings, assuming

a growth rate of 15% p.a.

KMCC P-E 20 4,869 3 4,150 124 3%KMCC valued at 20x FY17E earnings, assuming a growth

rate of 40% p.a.

Kotak Insurance P-BV 3 40,398 22 12,910 2,289 18% Insurance valued at 3x FY17E book, with 10% growth p.a.

Kotak Investment

Advisors% of AUM 5% 3,415 2 2,660 260 10%

Kotak Investment Advisors valued at 5% of AUM, with

AUM assumed to grow at 10% p.a. (0.46% yield)

Kotak AMC % of AUM 3% 14,565 8 511 -362 -71%Kotak AMC valued at 3% of AUM, with AUM assumed to

grow at 12% p.a. (-0.09% yield)

Kotak International % of AUM 4% 11,091 6 3,531 353 10%Kotak International valued at 4% of AUM, with AUM

assumed to grow at 15% p.a. (0.17% yield)

Kotak Investments P-BV 2 17,603 10 6,172 1,064 17%Investments valued at 2.0x FY17E book, assuming 15%

growth p.a.

Other Subsidiaries P-BV 1 2,713 1 2,089 228 11%Other subsidiaries valued at 1.0x book, assumed to grow

at 8% p.a.

All Subsidiaries 3,05,472 168 89,364 11,926 13%

Kotak Mahindra Bank* P-ABV 3.0 7,80,767 429 2,16,808 24,841 12% Merged Bank valued at 3.0x FY17E ABV and is expected

to grow at 21% CAGR for FY15-FY17, with RoAs

expanding to 1.7% for the merged bank, (RoEs expanding

to 16%).Total 10,86,239 597

SOTP Valuation

Page 10

Kotak Mahindra BankScoring Matrix

Page 11

Scores – 1 to 5 (Higher the better) AXSB HDFCB ICICIBC IIB KMB (M) YES

Market Share & Growth ▲ 78 92 70 92 87 92

Profitability ▲ 74 84 78 82 74 72

Asset Quality ▲ 69 83 55 83 84 79

Capital ▲ 92 88 86 88 82 90

Valuation ▲ 34 20 66 20 28 38

Overall Rank without weights ▼ 6 2 4 3 5 1

Overall Rank with weights ▼ 5 1 6 2 4 3

▲ Higher the better, ▼Lower the better

Kotak Mahindra Banks ranks 4 amongst the six new gen private sector banks in Spark Capital’s proprietary scoring matrix

KMB scores have fallen on the profitability front consequent to taking over the lesser profitable franchise of VYSB.

On the capital front, the bank’s pace of capital consumption worsens impacting scores

The bank currently scores the best in asset quality, but any negative surprises in the erstwhile ING Vysya bank’s asset quality could see

scores deteriorating.

Kotak Mahindra BankFinancial Summary

Page 12

Abridged Financial Statements Key Metrics

Rs.mn FY15 FY15E FY16E FY17E FY18E FY15 FY15E FY16E FY17E FY18E

Profit & Loss Standalone KMB + VYSB combined entity Growth ratios Standalone KMB + VYSB combined entity

Net Interest Income 42,237 62,278 76,725 94,145 1,17,286 ABV per share 15% 11% 11% 16% 17%

Other Income 20,285 29,575 37,208 46,165 57,097 Advances 25% 22% 20% 22% 25%

Fee Income 12,263 20,609 27,399 35,023 44,526 Deposits 27% 23% 22% 22% 25%

Treasury Income 3,148 4,696 5,809 6,742 8,171 NII 14% 14% 23% 23% 25%

Total Income 62,522 91,853 1,13,933 1,40,309 1,74,383 PAT 28% 9% 15% 31% 32%

Operating Expenses 32,547 49,091 61,764 75,385 91,798 EPS 28% 9% 15% 31% 32%

Pre-Provision Profit 29,975 42,762 52,168 64,924 82,585 Asset Quality

Provisions 1,645 5,222 8,952 8,463 7,881 Gross NPA (Rs. mn) 12,372 20,165 28,124 31,498 36,538

PBT 28,330 37,541 43,216 56,461 74,705 Gross NPA 1.9% 1.9% 2.2% 2.0% 1.8%

PAT 18,660 24,841 28,523 37,264 49,305 Net NPA 0.9% 0.9% 1.1% 1.0% 0.9%

Balance Sheet Slippage 1.1% 2.2% 2.2% 1.7% 1.5%

Networth 1,41,441 2,16,808 2,43,514 2,79,980 3,28,486 Coverage 50.8% 53.1% 49.0% 52.0% 51.0%

Deposits 7,48,603 12,29,780 14,98,655 18,28,359 22,85,449 Growth in Gross NPA 16.8% 18.4% 39.5% 12.0% 16.0%

CASA 2,72,174 4,31,094 5,53,140 6,94,777 8,91,325 Asset-Liability Profile

Borrowings & Current Liabilities 1,70,077 2,83,751 3,55,182 4,08,687 5,32,603 Leverage (x) 6.2 6.8 7.4 7.8 8.3

Total Liabilities & Networth 10,60,121 17,31,361 20,98,373 25,18,047 31,47,559 CD ratio 88.4% 88.0% 87.0% 87.0% 87.0%

Cash with RBI & other banks 62,624 1,31,536 1,16,269 1,40,556 1,75,486 CASA 36.4% 35.1% 36.9% 38.0% 39.0%

Advances 6,61,607 10,82,637 13,03,830 15,90,673 19,88,341 Tier I CAR 17.2% 15.3% 14.4% 13.8% 12.9%

Investments 3,04,211 4,73,503 6,24,688 7,26,711 9,15,517 Profitability and Efficiency

Fixed & Current Assets 31,679 55,259 53,585 60,108 68,215 Net Interest Margin 4.7% 4.2% 4.3% 4.4% 4.4%

Total Assets 10,60,121 17,42,936 20,98,373 25,18,047 31,47,559 ROA 1.9% 1.5% 1.5% 1.6% 1.7%

Other Information ROE 14.1% 12.1% 12.4% 14.2% 16.2%

Shares outstanding (mn) 1,545 1,821 1,821 1,821 1,821 Valuation

Current market price (Rs.) 711 711 711 711 711 Book Value per share (Rs.) 92 119 134 154 180

Market capitalisation (Rs. mn) 10,98,285 12,94,465 12,94,465 12,94,465 12,94,465 Adj Book Value per share (Rs.) 88 114 126 145 171

Earnings per share (Rs.) 12.1 13.6 15.7 20.5 27.1 P/ABV (x) 6.9 5.3 4.6 3.8 3.1

Dividend per share (Rs.) 0.5 0.5 0.4 0.4 0.4 P/E (x) 58.9 52.1 45.4 34.7 26.3

Kotak Mahindra BankRecommendation History

Page 13

0

100

200

300

400

500

600

700

800

900

01-Jul-12 01-Jan-13 01-Jul-13 01-Jan-14 01-Jul-14 01-Jan-15 01-Jul-15

Historical Target

Kotak Mahindra Bank

Report Date CMP (Rs.) TP (Rs.) Recommendation

13/May/15 660 729 Buy

23/Mar/15 670 810 Buy

27/Oct/14 530 609 Buy

17/Jul/14 442 516 Buy

02/May/14 402 464 Buy

22/Jan/14 353 406 Buy

24/Oct/13 354 411 Buy

10/Sep/13 340 401 Buy

19/Jul/13 343 311 Sell

03/May/13 359 311 Sell

25/Jan/13 333 290 Sell

26/Oct/12 308 263 Sell

Report Date CMP (Rs.) TP (Rs.) Recommendation

01/Oct/12 325 238 Sell

21/Sep/12 311 238 Sell

07/Sep/12 289 238 Sell

26/Jul/12 271 238 Sell

29/Jun/12 296 310 Buy

Disclaimer

Page 14

Spark Disclaimer

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infrastructure advisory services. Spark Capital is registered with SEBI as a Stock Broker and Category 1 Merchant Banker.

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have not been debarred from doing business by any Stock Exchange/SEBI or any other authorities, nor has our certificate of registration been cancelled by SEBI at any point of

time.

Spark Capital has a subsidiary Spark Investment Advisors (India) Private Limited which is engaged in the services of providing investment advisory services and is registered

with SEBI as Investment Advisor. Spark Capital has also an associate company Spark Infra Advisors (India) Private Limited which is engaged in providing infrastructure

advisory services.

This document does not constitute or form part of any offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction.

This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Nothing in this document should

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companies referred to in this document.

Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies

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deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit

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This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through an independent analysis by Spark

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or reliance on this report.

Absolute

Rating

Interpretation

BUY Stock expected to provide positive returns of >15% over a 1-year horizon REDUCEStock expected to provide returns of <5% – -10% over a 1-year

horizon

ADDStock expected to provide positive returns of >5% – <15% over a 1-year

horizonSELL Stock expected to fall >10% over a 1-year horizon

Disclaimer (Cont’d)

Page 15

Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency,

Spark Capital has incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report:

Disclosure of interest statement KMB

Analyst financial interest in the company No

Group/directors ownership of the subject company covered No

Investment banking relationship with the company covered No

Spark Capital’s ownership/any other financial interest in the company covered No

Associates of Spark Capital’s ownership more than 1% in the company covered No

Any other material conflict of interest at the time of publishing the research report No

Receipt of compensation by Spark Capital or its Associate Companies from the subject company covered for in the last twelve months:

Managing/co-managing public offering of securities

Investment banking/merchant banking/brokerage services

Products or services other than those above

In connection with research report

No

Whether Research Analyst has served as an officer, director or employee of the subject company covered No

Whether the Research Analyst or Research Entity has been engaged in market making activity of the Subject Company; No

Analyst Certification of Independence

The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research

analyst’s compensations was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in the report.

Additional Disclaimer for US Institutional Investors

This research report prepared by Spark Capital Advisors (India) Private Limited is distributed in the United States to US Institutional Investors (as defined in Rule 15a-6 under

the Securities Exchange Act of 1934, as amended) only by Auerbach Grayson, LLC, a broker-dealer registered in the US (registered under Section 15 of Securities Exchange

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to you. You should satisfy yourself before reading it that Auerbach Grayson, LLC and Spark Capital Advisors (India) Private Limited are permitted to provide research material

concerning investment to you under relevant legislation and regulations;

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