Mumbai: UBS has downgraded Kotak Mahindra Bank to sell from neutral and slashed target price to Rs 1,050 from Rs 1,500 as it believes the private sector lenders valuation premium to its peers is at risk.The brokerage has lowered loan growth estimate for the ongoing financial year to 6 per cent from 8 per cent earlier, given the managements cautious stance and slowing loan growth.The brokerage said the valuation premium of Kotak Mahindra Bank to peer banks is significantly above the five-year average, which is likely to narrow in the next six to 12 months.From this level, we believe the upside risk is limited while downside risk is high, said UBS.The market has been plagued by coronavirus-related concerns since February.
Shares of Kotak Mahindra Bank have fallen 26 per cent while Bank Nifty has declined 37 per cent during this period.On Monday, the Kotak Mahindra stock ended down 2 per cent at Rs 1,251.25 .Despite the recent price correction, the bank continues to trade at a significant premium to large private sector banks.
Its banking business is trading at 3.1 times FY21 estimated P/BV and 31 times FY21 estimated PE after adjusting for the subsidiaries value, said UBS.Kotak Mahindra Bank reported a 24 per cent year-on-year rise in standalone net profit at Rs 1,596 crore for the December quarter.
Gross non-performing assets for the quarter stood at 2.46 per cent, higher than 2.32 per cent in the September quarter and 2.07 per cent in the December quarter of the previous year.UBS said Kotak has navigated around troubled sectors in the past, and on a relative basis its asset quality risk looks lower than peers.The brokerage flagged unexpected credit risk due to the broader slowdown.
Kotak has exposure to vulnerable sectors such as autos and unsecured personal loans, including small business loans, at around 24 per cent of total loans, as well as small and medium enterprises, said UBS.The brokerage expects credit costs of the bank for the financial year ended March and the ongoing financial year to rise 1.25-1.5 per cent, which would still be lower than after global financial crisis levels in FY09-10.