Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+' ratings on the debt instruments of Kotak Mahindra Bank Limited (KMBL; part of the Kotak group). Further, CRISIL Ratings has withdrawn its rating on Rs.500 crore of Perpetual Non Cumulative Preference shares, at the request of the company and third party confirmation of the extinguishment of these perpetual non cumulative preference shares. The withdrawal is in line with the withdrawal policy of CRISIL Ratings.

 

Kotak Bank has acquired Sonata finance private limited as a wholly owned subsidiary effective March 28, 2024. Sonata Finance private limited is a Non-Banking Finance Company – Micro Finance Institution registered with the RBI. Sonata is operating in 10 states through 549 branches and has an Asset Under Management (AUM) of approximately Rs. 2,620 crore as of December 31, 2023. The purchase consideration of the transaction is Rs 537 crore.

 

The ratings continue to reflect the Kotak group’s strong capitalisation, healthy asset quality and comfortable earnings.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the financial and business risk profiles of KMBL and its subsidiaries and associates. This is because all the entities, collectively referred to as the Kotak group, have extensive business and operational linkages, shared senior management and similar brand.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation

Key Rating Drivers & Detailed Description

Strong capitalisation

The Kotak group has maintained its strong capital position. Absolute networth (capital and reserves) increased to Rs 125,039 crore as on December 31, 2023 against Rs 112,254 crore as on March 31, 2023 (Rs 97,134 crore as on March 31, 2022). CET-1 ratio and overall CAR were healthy at 21.2% and 22.2%, respectively as on December 31, 2023 (Including profits); 22.3% and 23.3, respectively, as on March 31, 2023. Capitalisation is supported by the demonstrated ability to raise capital. Networth (capital and reserves) coverage for net non-performing assets (NPAs) remains comfortable at 76 times as on December 31, 2023 (70 times as on March 31, 2023) for the bank on standalone basis. Capitalisation of other fund-based Kotak group entities was also comfortable with gearing of Kotak Mahindra Prime Ltd at 2.2 times as on March 31, 2023 and Kotak Mahindra Investments Ltd at 3.3 times as on March 31, 2023 (as per Indian Accounting Standards).

 

CRISIL Ratings believes the Kotak group's capitalisation will continue to be backed by steady internal cash accrual and remain strong to support growth initiatives over the medium term.

 

Healthy asset quality

The Kotak group has demonstrated its ability to maintain asset quality through cycles. The group's gross NPAs stood at 1.7% as on December 31, 2023 as against 1.8% as on March 31, 2023 (2.4% as on March 31, 2022). The reduction in NPAs was primarily because of accelerated recovery and higher growth. The provisioning cover of the group is 79% as on March 31, 2023

 

The portfolio under special mention account (SMA) 2 (Fund based outstanding for borrowers with exposure > Rs. 5 cr) is Rs. 210 crore as on December 31, 2023. Furthermore, while around 29% of the portfolio comprises corporate and business banking, and hence is chunky in nature, these are largely higher rated corporates thus reducing the risk in that portfolio. CRISIL Ratings believes the Kotak group's stringent underwriting standards, strong risk management systems and processes, and rigorous collection measures will keep asset quality healthy over the medium term. However, delinquencies could inch up due to the challenging current macro environment. 

 

Comfortable earnings

The Kotak group has comfortable earnings with return on assets (RoA) at ~2.6% for FY23 (2.4% for FY22).  The annualized RoA stood at 2.6% for 9MFY24 as well.

 

The earnings profile of the bank remains supported by healthy net interest margin (excluding other income) of 4.9%* for December 31, 2023 (4.7%* for fiscal 2023). Furthermore, with continued focus on low-cost current and savings accounts (48% share in total deposits as on December 31, 2023) and deposit rate cuts, the cost of saving account have improved over the years to 3.76% in fiscal 2023 and further to 4.14% in nine months fiscal 2024 . The group's business is diversified across financial services, ensuring a healthy mix of fund- and fee-based revenue streams. CRISIL Ratings believes KMBL will continue to maintain comfortable profitability, given the high interest spreads and healthy fee income.

Liquidity: Superior

Liquidity continues to be superior, supported by sizeable retail deposit base that forms a significant part of the total deposits. The daily average liquidity coverage ratio for the quarter ended December 31, 2023, was at 126.9% against the regulatory requirement of 100% on the group level. The bank's liquidity also benefits from access to systemic sources of funds such as the liquidity adjustment facility from the RBI, access to the call money market, and refinance limits from sources such as National Bank for Agriculture and Rural Development and Small Industries Development Bank of India

 

CRISIL Ratings believes KMBL’s environment, social and governance (ESG) profile supports its already strong credit risk profile.

 

The ESG profile in the banking sector typically factors in governance as a key differentiator between individual banks. The sector has reasonable social impact because of its nationwide presence, substantial employee and customer base, and it can play a key role in promoting financial inclusion. While the sector does not have direct adverse environmental impact, the lending decisions may have a bearing on the environment.

 

KMBL has ongoing focus on strengthening various aspects of its ESG profile.

 

KMBL’s key ESG highlights:

 

• The bank has adopted an ESG Management Systems Plan to provide guidance for evaluation of social and environmental risks of eligible borrowers. Capital expenditure and working capital loans above a certain size and tenure are evaluated through the lens of this plan.
• The bank has taken various steps to reduce its captive carbon footprint. Some of these initiatives include use of renewable energy power, optimised use of energy, investing in energy efficient building services, transitioning to energy efficient lighting and switching to virtual servers, among others.
• The bank has installed recycling facilities at select premises to reduce freshwater consumption.
• As on March 31, 2023, the bank’s workforce comprised ~26.39% women. Exclusive recruitment drives for women candidates, identification of specific business roles designated for women, coaching intervention and special digital learning platform are some of the initiatives taken by the bank in this area.
• 50% of the board members are independent directors and there is a split in chairman and executive positions. The bank has a dedicated investor grievance redressal mechanism and the disclosures put out by it are extensive.

 

There is growing importance of ESG among investors and lenders. KMBL’s commitment to ESG will play a key role in enhancing stakeholder confidence, given high share of foreign institutional investors as well as access to both domestic and foreign capital markets.

Outlook: Stable

CRISIL Ratings believes the Kotak group should continue to report steady growth in its lending business, while maintaining healthy asset quality and strong capitalisation, over the medium term. Earnings will continue to benefit from diversified business risk profile.

Rating Sensitivity Factors

Downward factors

• Higher-than-expected deterioration in asset quality, thereby impacting earnings profile
• Decline in CAR (including capital conservation buffer) with overall CAR remaining below 15% on sustained basis

About the Group

KMBL is the flagship company of the Kotak group and has diversified operations covering commercial vehicle financing, consumer loans, corporate finance and asset reconstruction. Through its subsidiaries, the bank is engaged in investment banking, equity broking, securities-based lending and car finance. KMBL was reconstituted as a commercial bank from a non-banking financial company (NBFC) in fiscal 2003 to provide a more comprehensive range of financial services. Effective April 1, 2015, ING Vysya Bank was merged with KMBL and the integration process has been completed.

 

Other than KMBL, the key operating companies of the Kotak group are Kotak Mahindra Prime Ltd (car financing), Kotak Mahindra Capital Company (investment banking), Kotak Securities Ltd (retail and institutional equities broking, and portfolio management services), Kotak Mahindra Investments Ltd (commercial real estate lending ) and Kotak Investment Advisors Ltd (alternate assets space). The group also operates in the life and general insurance business through Kotak Mahindra Life Insurance Company Ltd and Kotak Mahindra General Insurance Company Ltd. It is also present in the asset management business through Kotak Mahindra AMC and Trustee Company Ltd, and recently launched Kotak Infrastructure Debt Fund. The acquisition of BSS Microfinance Ltd (formerly known as BSS Microfinance Pvt Ltd), a NBFC-micro finance institution (NBFC-MFI) was completed during fiscal 2018.

 

The Kotak group's profit after tax (PAT) was Rs 12876 crore on a total income (net of interest charges) of Rs 50011 crore for nine months fiscal 2024 against PAT of Rs 14,925 crore on total income (net of interest charges) of Rs 53,731 crore for fiscal 2023.

 

KMBL reported PAT of Rs 9648 crore on a total income (net of interest charges) of Rs 26,379 crore for nine months fiscal 2024 against Rs 10,939 crore on total income (net of interest charges) of Rs 28,635 crore for fiscal 2023.

Key Financial Indicators

		Standalone			Consolidated
As on/for the year ended March 31	Units	9M2024	2023	2022	9M2024	2023	2022
Customer assets	Rs crore	4,00,759	3,52,652	2,95,273	451524	3,93,882	3,29,866
Total income (net of interest charges)	Rs crore	26,379	28,635	22,804	50011	53,731	46,960
Profit after tax	Rs crore	9,648	10,939	8,573	12876	14,925	12,089
Gross NPA	%	1.7%	1.8%	2.3%	1.7%	1.8%	2.4%
Overall capital adequacy ratio (including unaudited profits profits)	%	21.2	21.8	22.7	22.2	23.3	23.7
Return on assets (annualized)*	%	2.5	2.5	2.1	2.6	2.6	2.4

   *as per CRISIL calculation

Any other information: Not Applicable