Kotak Mahindra Bank Limited Ratings Reaffirmed
Rating Action
*Originally issued by erstwhile ING Vysya Bank 1 crore = 10 million Refer to annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AAA/CRISIL AA+/FAAA/Stable/CRISIL A1+' ratings on the existing debt instruments of Kotak Mahindra Bank Limited (KMBL; part of the Kotak group).
Also, CRISIL Ratings has withdrawn its rating on Rs 150 crore lower tier-II bonds (under Basel II) and Rs 962 crore infrastructure bonds as these bonds have been redeemed. The withdrawal is in line with the withdrawal policy of CRISIL Ratings.
The ratings continue to reflect the Kotak group’s strong capitalisation, healthy asset quality and comfortable earnings.
Under the schemes announced by the Reserve Bank of India (RBI) dated January 1, 2019, February 11, 2020, August 6, 2020, and May 5, 2021, and the resolution framework for stressed accounts, KMBL had restructured 0.5% of advances as on December 31, 2021. Nevertheless, impact of any fourth wave of the Covid-19 pandemic, if and when it comes, on collections and delinquencies will be a key monitorable. |
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
The Kotak group has maintained its strong capital position. Absolute networth (capital and reserves) increased to Rs 93,141 crore as on December 31, 2021 (Rs 84,836 crore as on March 31, 2021), from Rs 82,116 crore as on December 31, 2020. Tier-I capital adequacy ratio (CAR) and overall CAR were healthy at 23.7% and 24.5%, respectively, as on December 31, 2021 (including unaudited profits for the quarter; 22.6% and 23.4%, respectively, as on March 31, 2021). Capitalisation is supported by the demonstrated ability to raise capital. The bank raised Rs 7,442.5 crore during fiscal 2021 through qualified institutional placement. Networth (capital and reserves) coverage for net non-performing assets (NPAs) was also comfortable at 37.3 times as on December 31, 2021 (27.3 times as on March 31, 2021). Capitalisation of other fund-based Kotak group entities was also comfortable with gearing of Kotak Mahindra Prime Ltd and Kotak Mahindra Investments Ltd at 2.2 times and 2.8 times, respectively, as on March 31, 2021 (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.
The Kotak group has demonstrated its ability to maintain asset quality through cycles. The group's gross NPAs were 2.75% as on December 31, 2021 (3.25% as on March 31, 2021), up from 2.25% as on December 31, 2020. The increase in NPAs was primarily because of accelerated recognition of stressed accounts as NPAs. The group has provisioning cover of 69%, with networth coverage for net NPAs at 37 times as on December 31, 2021 (27 times as on March 31, 2021).
The portfolio under special mention account (SMA) 2 continues to be low at 0.14% of advances as on December 31, 2021. Furthermore, while around 35% 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.
The Kotak group has comfortable earnings with return on assets (RoA) at ~2.2% for fiscal 2021. While profitability was impacted in the first quarter of the current fiscal, it has picked up subsequently with RoA of ~2.2% for the nine months ended December 31, 2021.
The earnings profile remains supported by healthy net interest margin[1] of 4.3% for fiscal 2021 (4.2% for fiscal 2020). Furthermore, with continued focus on low-cost current and savings accounts (59.9% share in total deposits as on December 31, 2021) and deposit rate cuts, the cost of deposits have improved over the years to 3.7% in fiscal 2021. 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. [1] Net interest margin is calculated as: Net Interest income for the period/ Average of total assets at the start and end of the period |
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, 2021 at consolidated level was at 145.84% against the regulatory requirement of 100%. 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
ESG profile 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 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:
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
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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 securities-based 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 8,593 crore on total income of Rs 56,704 crore (excluding sub-brokerage) for fiscal 2021, against Rs 8,593 crore and Rs 50,300 crore (excluding sub-brokerage), respectively, for fiscal 2020. For the nine months ended December 31, 2021, the group reported PAT of Rs 8,198 crore on total income of Rs 42,089 crore (excluding sub-brokerage), against Rs 7,401 crore and Rs 40,750 crore (excluding sub-brokerage), respectively, for the corresponding period of the previous fiscal.
KMBL reported PAT of Rs 6,965 crore on total income of Rs 32,299 crore for fiscal 2021, against Rs 5,947 crore and Rs 32,302 crore, respectively, for fiscal 2020. For the nine months ended December 31, 2021, the bank reported PAT of Rs 5,805 crore on total income of Rs 24,501 crore, against Rs 5,282 crore and Rs 24,098 crore, respectively, for the corresponding period of last fiscal. |
Key Financial Indicators
*For average assets, assets as on December 31 and March 31, have been considered | ||||||||||||||||||||||||||||||||||||||||||||||||
Any other information: Key features of KMBL’s Rs 500 crore perpetual non-cumulative preference shares (under Basel III)
Note on tier-I instruments (under Basel III) The distinguishing features of non-equity tier-I capital instruments (under Basel III) are the existence of coupon discretion at all times, high capital thresholds for likely coupon non-payment, and principal write-down (on breach of a pre-specified trigger). These features increase the risk attributes of non-equity tier-I instruments over those of tier-II instruments under Basel III, and capital instruments under Basel II. To factor in these risks, CRISIL Ratings notches down the rating on these instruments from the bank's corporate credit rating. The rating on the bank's tier-I bonds (under Basel III) is lower by one notch from the bank's corporate credit rating, in line with CRISIL Ratings' criteria (refer to 'CRISIL's rating criteria for Basel III-compliant instruments of banks').
The factors that could trigger a default event for non-equity tier-I capital instruments (under Basel III), resulting in non-payment of coupon, include: i) the bank exercising coupon discretion, ii) inadequacy of eligible reserves to honour coupon payment if the bank reports low profit or a loss, or iii) the bank breaching the minimum regulatory CET I, including counter cyclical buffer ratio. Moreover, given their additional risk attributes, the rating transition for non-equity tier-I capital instruments (under Basel III) can potentially be higher than that for tier-II instruments. |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
*Originally issued by erstwhile ING Vysya Bank **Yet to be issued
Annexure - Details of rating withdrawn
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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