India Ratings & Research (Ind-Ra) has assigned's Kotak Mahindra Bank (KMB) proposed Rs 3 billion senior long-term bonds an 'AAA' rating. The agency has also upgraded the bank's long-term issuer rating to 'AAA' from 'AA+'. The outlook is stable.
The ratings reflect Ind-Ra's expectation that KMB will maintain its consistently superior credit buffers through the rest of this decade, even as the bank pursues above-average growth.
KMB's credit profile benefits from its strong management, consistently above-average core capitalisation, established risk management capabilities, and high margins backed by earnings diversity and stable operating costs.
Being a relatively new bank, KMB lags behind its peers in branch network and share of stable low-cost deposits, which affects its cost of borrowings. This is being addressed through organic and potentially inorganic expansion of the bank’s franchise, it said.
KMB's strong pre-provision operating profitability (PPOP/average assets of 3.01% in FY14 on a standalone basis) and robust capitalisation (Tier 1 ratio of 17.8% at FYE14 (all core)) provide solid buffers and comparable with those of its 'AAA' rated peers. The bank's ability to adequately price its risk further boosts its credit profile. Indeed, according to Ind-Ra's stress test on Indian banks, KMB outperforms all other Indian banks in terms of profitability and capital adequacy under stressed credit conditions. KMB’s stress tolerance capacity is the key reason for the rating upgrade.
Ind-Ra expects KMB's Tier 1 ratio to remain healthy (over 12%) in the medium term, through high internal accruals and moderated loan growth. Unless the risk-weighted asset growth was to accelerate significantly, these should help the bank meet Basel III capital requirements without any additional capital raising over the next three-to-four years. While there have been regular equity injections in the past, KMB has the most flexibility among Indian banks to raise equity from the market due to the high valuations it has enjoyed over the last few years.
According to the Reserve Bank of India guidelines, KMB will need to dilute promoter shareholding from the current level of around 40% to 20% by FYE18. It is possible that KMB might look at inorganic growth to increase equity base and reduce promoter holding.
Ind-Ra believes any inorganic growth by KMB will be aimed at improving the franchisee network and price in the other risks.
Ind-Ra, therefore, expects KMB's strong buffers to help it absorb any credit weaknesses of the acquired bank, and the combined bank's franchisee, capitalisation, credit profile and profitability will remain akin to other 'AAA' rated private sector banks. "Thus, while there could be short-term fluctuations in the credit metrics if KMB proceeds with any acquisition, Ind-Ra expects it to be credit positive over the medium term unless integration challenges prove insurmountable."
