Hold

Bank

Kotak Mahindra
12th Sept, 2011

CMP: 453 Fiduciary Euromax Capital Markets Pvt. Ltd.

Key Highlights Poised to witness above-average growth: We expect KMB to continue beating industry advance growth rates by a significant margin. Aided by robust (~29%) loan book growth and high NIMs (~5.2%) over the next two years, supported by the groups asset mix (albeit some margin pressure in the medium term) we expect KMB to record healthy growth in NII going forward. Robust CAR presents solid ground for loan book growth: KMB reported a robust capital adequacy ratio (CAR) of 19.5% and a Tier I capital ratio of 18.1% as at 31 March 2011 on a consolidated basis. This will support balance sheet growth going forward without the need for raising fresh capital in the foreseeable future and also allow the bank to grow its return on equity (RoE) going forward. Financial supermarket model provides diversification: KMBs financial supermarket model gives it the advantage of exploiting the growth potential of various financial services verticals outside of traditional banking and opens up significant cross-selling opportunities. Further, as the bank generates a significant proportion of its income from non-balance sheet businesses it generates higher return on assets (RoA) compared to its peers. Company Description: Incorporated in 1985 as Kotak Capital Management Finance Ltd. and rechristened Kotak Mahindra Finance Ltd. a year later, the company started bill discounting activities in 1986. The company entered upon the lease and hire purchase business in 1987 and in 1990 it commenced its car finance operations. In 1991, the companys investment banking division was started and in the same year it took over FICOM, one of India's largest financial retail marketing networks. In 2003, the company commenced full-fledged banking operations as Kotak Mahindra Bank Ltd. (KMB) after receiving a license from the Reserve Bank of India (RBI). Today KMB is a financial supermarket offering a wide range of services such as banking, car finance, life insurance, securities broking, investment banking and asset management. KMB operates the commercial banking business of the group and is also the holding company of 16 subsidiaries managing the other businesses of the company. KMB also holds a majority stake in its life insurance joint venture (JV) with Old Mutual Plc. As at 31 March 2011 the bank had 321 branches and 710 ATMs. KMB is the fourth largest private bank in India in terms of market capitalization.

Fiduciary Euromax Capital Markets Pvt. Ltd. Bank

Kotak Mahindra

Exhibit 1: Financial Summary

Day's High / Low Previous Close / Open Weekly H/L Monthly H/L 52 Weeks H/L

484.00 / 470.00 479.85 / 482.00 484 / 484 / 529.5 / ( 14 Oct 10 )

449 411.2 333.25 ( 9 Feb 11 )

Financial Projections (in Million) Revenue Net Profit EPS PE CAR (standalone) NPM (standalone) %

FY11 83948 15667 21.73 43.6 19.92

FY12E 77930 18187 24.28 35.5 18.15 23.33

FY13E 93628 22013.6 29.65 29.2 19.92 20.18

% 18.66

Shareholding Pattern (in %) Promoter FII DII Others

11-Jun 45.51 26 5.4 23.09

11-Mar 45.57 25.4 5.44 23.59

10-Dec 45.61 23.99 5.84 24.56

Page 2 of 6 Biswajeet J. Pattnaik, biswajeet@fegroup.in

Fiduciary Euromax Capital Markets Pvt. Ltd. Bank

Kotak Mahindra

Exhibit 2: Shareholding pattern (exceeding 1%)

Sl. No.
Key Strengths
Poised to witness above-average growth

KMBs loan book grew by a robust CAGR of 32% compared with an industry average of 21% between 2006 and 2011. The banks deposit base grew at a CAGR of 37% during the same period compared to an industry average of 20%. KMBs NIMs have always been higher than most of its peers, attributable to its asset mix with significant presence in high yielding segments such as car finance, and commercial vehicle (CV) and commercial equipment (CE) finance (car finance: 21%; CVs & CEs: 15% as at the end of FY 2011). The bank, historically, had a

Name Shareh Sumitom Banking Corporati

Page 3 of 6

Biswajeet J. Pattnaik, biswajeet@fegroup.in

Fiduciary Euromax Capital Markets Pvt. Ltd. Bank

Kotak Mahindra

relatively high exposure to retail loans, which over the past few years has reduced (FY 2011: 3% vs. FY 2008: 14%). For FY 2011, KMB reported an NIM of 5.8% on a consolidated basis. We expect NIM to be pressured a bit during FY 2012 due to higher cost of funds. In general, too, we expect NIMs to trend lower than the high historical levels (FY 2010: 6.1%) as the bank increases exposure to lower yielding asset classes such as corporate and mortgage loans; nonetheless, we expect consolidated NIM to remain above 5% over the next couple of years. Robust CAR presents solid ground for loan book growth KMB reported a robust capital adequacy ratio (CAR) of 19.5% and a Tier I capital ratio of 18.1% as at 31 March 2011 on a consolidated basis. This will support balance sheet growth going forward without the need for raising fresh capital in the foreseeable future. We expect the advances to grow by an average of ~29% annually over the next couple of years, a rate substantially higher than the expected rate of growth for industry advances. The banks strong capital position will also allow it to grow its return on equity (RoE) going forward. Financial supermarket model provides diversification KMBs financial supermarket model gives it the advantage of exploiting the growth potential of various financial services verticals outside of traditional banking. This model also opens up significant cross-selling opportunities with the group having presence in a gamut of services in both the retail as well as corporate markets. Further, as the bank generates a significant proportion of its income from non-balance sheet businesses (noninterest income contributed 58% of total income in FY 2011) it generates higher return on assets (RoA) compared to its peers. KMB also has a well established agricultural lending business (~10% of loan book at the end of FY 2011) which is profitable and has witnessed robust growth. Its agri portfolio has also enabled the bank to consistently meet its priority sector lending (PSL) targets which in turn has resulted in the bank not requiring putting significant amounts of money into the low-yielding Rural Infrastructure Development Fund (RIDF). Subsequently, this has contributed positively to the high NIMs of the bank. Further, this has also enabled the bank to restrict its microfinance institution (MFI) exposure to ~0.2% of total advances. Key Risks Any deterioration of the overall economic environment may lead to slower credit off take an increase in slippages compared to what have been modeled into our forecasts, thereby negatively impacting profits. As KMBs asset mix consists of a high proportion of high-yield assets, a worsening of the economic environment is likely to impact KMB more than the banks having a greater proportion of low-yield, and thereby less risky, assets on its books. Kotak is heavily exposed to capital markets, via retail and institutional brokering, investment banking, and third-party funds distribution. We believe, however, that it may not be able to exploit these opportunities as well as it had in the past because: BrokeringYields and market share are declining: Market share and yields in the online brokering business are trending down, with increased competition and further geographical penetration decelerating. Investment banking: Activity is picking up but float income could be lower: The investment banking business is likely to see tighter margins this time around, especially with float

Page 4 of 6 Biswajeet J. Pattnaik, biswajeet@fegroup.in

Fiduciary Euromax Capital Markets Pvt. Ltd. Bank

Kotak Mahindra

income being capped by tighter regulation. Also, the number of days of float income is also being capped and this would further put pressure on revenue from IB. Distribution fees under pressure: Third-party distribution income is also under pressure, with front-end fees restricted on mutual funds and overall fees capped on life insurance.

Quarterly update Kotak Mahindra bank had delivered a mixed quarter. Standalone basis, its NII growth was somewhat disappointed on the back of NIMs compression. The CASA share has declined by 300 bps QoQ and 100 bps YoY to 27%. However this was mitigated by higher non-interest income growth better cost efficiency. Asset quality improved on QoQ as well as YoY basis. Lowers provisions had supported PAT. Bank had 323 full-fledged bank branches (262 branches as on June 30, 2010) across 184 locations and 725 ATMs. On the consolidated basis, top line & bottom-line was slightly disappointing on sequential basis. Consolidated NIM for Q112 stood at 5.0% (Q111 5.4%). Consolidated capital adequacy ratio (CAR) excluding profit for Q1 FY12 as per Basel II as on June 30, 2011 is 18.4%. Tier 1 ratio is 16.9%. Asset quality improved on consolidated basis too. Other details are as follows
Kotak Mahindra Bank Ltd. -Standalone- [INR-Millions] DESCRIPTION Q1'12 Q4'11 Q1'11 QoQ% YoY% Interest Earned 13297.82 12326.32 9208.03 7.9% 44.4% Interest Expended 7619.32 6110.65 4126.10 24.7% 84.7% NII 5678.50 6215.67 5081.93 -8.6% 11.7% Other Income 2286.62 1912.98 1370.73 19.5% 66.8% Total Income 7965.12 8128.65 6452.66 -2.0% 23.4% Operating Expenses 4104.56 4448.94 3299.24 -7.7% 24.4% Operating Profit before Prov.& Cont. 3860.56 3679.71 3153.42 4.9% 22.4% Provisions and Contingencies 220.85 -71.73 560.95 NA -60.6% PBT 3639.71 3751.44 2592.47 -3.0% 40.4% Tax 1119.36 1264.42 723.44 -11.5% 54.7% Net Profit (after Extraordinary Items) 2520.35 2487.01 1869.03 1.3% 34.8% Adj Calculated EPS 3.42 3.38 2.68 1.2% 27.6% Ratios% Q1'12 Q4'11 Q1'11 in BPS in BPS Capital Adequacy Ratio Basel II 18.15 19.92 16.79 -177.00 136.00 % of Net NPAs 0.66 0.72 1.33 -6.00 -67.00 % of Gross NPAs 1.88 2.03 3.29 -15.00 -141.00 Return on Assets 0.47 0.50 0.45 -3.00 2.00 Cost to Income 51.53 54.73 51.12 -320.00 41.00 CASA% 27.0 30.0 28.0 -300.00 -100.00 Kotak Mahindra Bank Ltd. -Consolidated- [INR-Millions] - NOT RATED DESCRIPTION Q1'12 Q4'11 Q1'11 QoQ% Interest Earned 18696.09 17227.10 12786.69 8.5% Interest Expended 9492.36 7743.62 5254.39 22.6% NII 9203.73 9483.48 7532.30 -2.9% Other Income 8610.32 13050.78 10626.70 -34.0% Total Income 17814.05 22534.26 18159.00 -20.9% Operating Expenses 11547.50 15488.65 12898.74 -25.4% Operating Profit before Prov.& Cont. 6266.55 7045.60 5260.26 -11.1%

YoY% 46.2% 80.7% 22.2% -19.0% -1.9% -10.5% 19.1%

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Biswajeet J. Pattnaik, biswajeet@fegroup.in

Fiduciary Euromax Capital Markets Pvt. Ltd. Bank

Kotak Mahindra

Provisions and Contingencies PBT Tax Profit After Tax Minority Interest Shares of Associates Consolidated Net Profit Adj Calculated EPS Ratios% % of Net NPAs % of Gross NPAs Return on Assets Cost to Income

241.62 6024.93 1831.27 4193.66 -120.34 87.69 4161.01 5.64 Q1'12 0.54 1.59 0.55 64.82

-85.71 7131.32 2076.70 5054.62 -185.16 44.32 4913.78 6.67 Q4'11 0.59 1.71 0.68 68.73

552.90 -381.9% -56.3% 4707.36 -15.5% 28.0% 1510.58 -11.8% 21.2% 3196.78 -17.0% 31.2% 17.97 -35.0% -769.7% 62.19 97.9% 41.0% 3276.94 -15.3% 27.0% 4.70 -15.4% 20.0% Q1'11 in BPS in BPS 1.19 -5.00 -65.00 2.79 -12.00 -120.00 0.56 -13.00 -1.00 71.03 -391.00 -621.00

Exhibit 3: Other Subsidiaries performance

Investment Opinion Since there is a huge dependence on the capital markets for its profitability, and it is one of the few stocks to return at the price at which we left, I think a position of 3000 shares initially and incrementally increasing the position depending on the current market scenario.

Page 6 of 6 Biswajeet J. Pattnaik, biswajeet@fegroup.in