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Axis Securities Report
Kotak Mahindra Bank Ltd.'s margins have remained stable sequentially at 5.22%. With challenges in deposit accretion higher cost of funds may impact margin in the near term, however, we expect margins at ~5.2% for FY24E.
Also, the management's focus on high-yielding loans would provide some support to margins. Thus, with robust advances in growth and margins remaining healthy would aid healthy net interest income growth.
Further, sub-dued growth has been reported in fees traction in the current year. Presently, higher spends on promotion and marketing kept the opex at elevated levels. However, the same is expected to decline and operating leverage will kick in, thereby supporting pre-provision operating profit growth.
Slippages are comfortable and bounce rate metrics are holding up currently. Moreover, gross non-performing asset has remained stable QoQ and net non-performing asset has improved.
However, asset quality is expected to normalise going forward. With margins remaining intact, we believe, the bank is poised to sustain ROA at 2.4% over FY24-26E.
Valuation and recommendation:
We have revised our margin estimate downward due to the challenge of deposit accretion and opex estimates upwards. We maintain our 'Buy' recommendation on the stock with a revised target price of Rs 2,140/share, valuing the bank's core book at three times Sep25E adjusted book value and subsidiaries at Rs 397/share. The target price implies an upside of 19% from the current market price.
Risks to our estimates and target price
The key risk to our estimates remains a slowdown in overall credit momentum which could potentially derail earnings momentum for the bank.
Management focusing on growing the unsecured portfolio would support margins but may come at the cost of challenges on asset quality.
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