Fitch Ratings has today affirmed Kotak Mahindra Bank Limited's (KMBL) National Long-term rating at 'AA+(ind)', National Short-term rating at 'F1+(ind)', Individual rating at 'C/D', Support rating at '5', INR5.75bn Lower Tier II debt at 'AA+(ind)' and its INR0.5bn Upper Tier II bonds at 'AA(ind)'. The Outlook is Stable.
The affirmations are premised on KMBL's strong capitalisation and management, above average financial performance along with the robust franchise that its subsidiaries have in auto finance, securities broking, investment banking and asset management businesses in India. The bank's relatively high dependence on wholesale funding and limited franchise in commercial banking constrain the ratings. Fitch has taken a consolidated view of KMBL and its subsidiaries to arrive at its credit profile.
KMBL's consolidated net income declined by 32% in FY09 due to lower contribution from its capital market businesses. Lending businesses - KMBL and Kotak Mahindra Prime Ltd (KMPL) - however remain resilient despite negligible loan growth (2% for the consolidated entity). Net interest income grew (KMBL: 23%; KMPL: 54%) on the back of net interest margin (NIM) improvements (KMBL: 50 bp; KMPL: 200 bp) made possible by better pricing power in H209. This coupled with cost rationalisation helped the consolidated entity attain a return on assets (RoA) of 1.61% in FY09, even though loan impairment charges increased by 40%. Despite a 76% increase in impairment charges, its strong NIM (6%) and stable fee income enabled the bank to achieve a standalone RoA of 0.97%, which is close to the system median. Over the next 12 months Fitch expects some NIM moderation due to increasing focus on corporate lending and credit costs are likely to remain elevated due to challenging business conditions. That said, KMBL's NIM is expected to remain above peers and coupled with its fee income platform limits downside to RoA.
A retail-asset focused bank (75% of loans are retail), KMBL faced considerable asset quality pressure over the last 12 months as repayment problems spread from the unsecured segment to other retail and SME segments. The NPL accretion rate (Additions to gross NPL/Opening loans: 3.32%) was amongst the highest in the system for FY09; Fitch has been informed that the trend has not reversed in Q110. The acquired stressed assets portfolio has added to the pressure. However unlike many other banks, KMBL's loan restructuring has been low and it has enhanced provisioning amid slowing loan growth. In Fitch's opinion, these actions along with KMBL's market knowledge are expected to keep it ahead of the asset quality curve.
Nevertheless, KMBL's ability to absorb an asset quality shock remains strong given its high capitalisation (standalone CAR of 19.86% and Tier I of 16.83% are the highest in the Indian banking system). Consolidated common equity (more than INR65bn in FY09) compares well with many large government banks. Dilution is unlikely over the next 12-18 months as management has articulated modest growth aspirations and ruled out capital infusion in subsidiaries. Fitch therefore expects KMBL's capitalisation to support it through the downturn.
While its low-cost deposit base grew to 32% of total deposits in FY09 (FY08: 28%), customer deposits as a proportion of total liabilities remains low at 53%, and its reliance on short-term wholesale funding is high (50% of deposits). Fitch notes that focus on wholesale funding has been enhanced over the last few months to take advantage of benign rates. While the resultant structural asset liability gaps are covered and the group has established refinancing capabilities, KMBL's vulnerability in a prolonged liquidity squeeze remains higher than its peers.
KMBL is a new private sector Indian bank whose subsidiaries (in car finance, asset management, securities broking, investment banking) occupy leading positions in their respective businesses.
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