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Brokerages see 30% further upside in Kotak Bank after Q2 numbers. Here’s why

reported a strong performance in the September 2022 quarter on a net interest income (NII) front, but a mixed performance on other parameters weighed on the analysts’ estimates.

Experts on the Dalal Street are majorly positive on the counter, but see some challenges for the bank in the near term. However, those bullish on the counter, see an up to 32 per cent rise in the stock.

Bank’s Q2FY23 earnings demonstrated its upbeat stance on repricing benefit, advance growth and credit cost outlook, said majority of the analysts.

Factors driving earnings beat include a surge in NIMs to 5.17 per cent, rose 25 per cent on a quarterly basis,, treasury hit being contained at Rs 630 crore and modest credit cost of 26 bps, said

.

“This was partially offset by opex rising 10 per cent QoQ. Endeavour to accelerate the liability engine may exert some deposit cost pressure, we maintain a ‘buy rating on the stock with an unchanged target price of Rs 2,451,” it added.

The brokerage has highlighted tamp up in retail liabilities and succession planning related to MD and CEO retirement in December 2023, as the key monitorables for the lender.

Global brokerage firm HSBC maintains a hold rating on the lender with a target price of Rs 2,030 but it sees EPS growth as a challenge, despite higher earnings.

“NIMs surprise but deposits remain a drag,” it added. “Deposit growth has to accelerate to fund credit growth, pressuring NIMs and Operational expenditure.”

Kotak reported a strong Q2FY23, outperforming 11 per cent and 4 per cent on PAT and NII, respectively. NIMs expanded 23 bps to 5.17 per cent. Loan and asset growth too came in strong at 5 per cent and 4 per cent QoQ, respectively, said Nuvama Research.

Since Kotak continues to lag peers on savings deposit growth and trade expenses, it added. “Its peers, in contrast, have demonstrated higher growth in granular savings.” However, the brokerage maintained a hold rating but increased target to Rs 1,980 from Rs 1,900 earlier.

Given the resilient asset quality and favourable risk-adjusted returns, the management indicated that the focus will be to build the unsecured book, which is likely to be margin accretive, said Nirmal Bang Institutional Equities.

“The management indicated that increase in the cost of deposits and scale-up of the agency business are likely to augment the liability profile,” it said. “We believe that NIM is likely to normalise going forward due to pressure from higher cost of funds.”

Asset quality improved QoQ, driven by lower gross delinquencies. Credit cost was negligible as the bank reversed the covid provisions. SMA balances and the restructured book declined QoQ, suggesting positive asset quality outlook, it added with a buy rating and a target price of Rs 2,289.

The 2QFY23 witnessed a better asset quality performance as GNPA at 2.08 per cent against 2.24 per cent in the previous quarter. The NPA ratio decreased because of sequentially lower slippages. However, upgrades and recoveries were down to Rs 940 crore.

The SMA2 book decreased meaningfully to 120 crore. The total restructuring amount moderated to Rs 990 crore in 1QFY23 out of which covid related restructuring is Rs 350 crore and rest is MSME restructuring, said

.

The provisioning expenses stood at 140 crore, higher than the previous quarter. “Nevertheless, the bank has utilized covid provision worth Rs 4,400 crore in this quarter,” it added, with a buy rating with a target price of Rs 2,304, citing its best in class RoA.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)


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