Rating Rationale
August 27, 2019 | Mumbai
Kotak Mahindra Bank Limited
Ratings Reaffirmed 
Rating Action
Rs.500 Crore Perpetual Non Cumulative Preference Shares CRISIL AA+/Stable (Reaffirmed) 
Rs.1800 Crore Infrastructure Bonds CRISIL AAA/Stable (Reaffirmed)
Rs.306 Crore Lower Tier-II Bonds (under Basel II)* CRISIL AAA/Stable (Reaffirmed)
Rs.150 Crore Lower Tier-II Bonds (under Basel II) CRISIL AAA/Stable (Reaffirmed)
Rs.210 Crore Lower Tier-II Bonds (under Basel II)* CRISIL AAA/Stable (Withdrawn)
Rs.35.8 Crore Lower Tier-II Bonds (under Basel II) CRISIL AAA/Stable (Withdrawn)
Fixed Deposits FAAA/Stable (Reaffirmed)
Rs.17000 Crore Certificate of Deposits CRISIL A1+ (Reaffirmed) 
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
*Originally issued by erstwhile ING Vysya Bank
Detailed Rationale

CRISIL has reaffirmed its ratings on the debt instruments of Kotak Mahindra Bank Ltd (KMBL; part of the Kotak group) at 'CRISIL AAAA/CRISIL AA+/FAAA/Stable/CRISIL A1+'. CRISIL has also withdrawn its rating on Rs 245.8 crore lower tier II bonds (under Basel II) (See Annexure 'Details of Rating Withdrawn' for details) since the outstanding against the same was nil.

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

CRISIL's rating on the Perpetual Non-Cumulative Preference Shares (Under Basel III) of KMBL is as per the criteria 'CRISIL's rating criteria for BASEL III-compliant instruments of banks'.

Analytical Approach

For arriving at the ratings, CRISIL has combined the financial and business risk profiles of KMBL and its subsidiaries and associates. This is because all the entities, collectively referred as the Kotak group, have extensive business and operational linkages, and same senior management and 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 capitalization: The Kotak group has maintained its strong capital position. Absolute networth (capital and reserves) increased to Rs 58,280 crore as on March 31, 2019 (Rs 60,231 crore as on June 30, 2019), from Rs 50,486 crore as on March 31, 2018. Tier-I capital adequacy ratio (CAR) and overall CAR were healthy, at 17.4% and 17.9%, respectively, as on March 31, 2019 (17.9% and 18.4%, respectively, including unaudited profits for the quarter ended as on June 30, 2019). Capitalization is supported by demonstrated ability to raise capital; the bank raised Rs 5,803 crore through a Qualified Institutional Placement (QIP) issuance in fiscal 2018. Networth coverage for net non-performing assets (NPAs) was also comfortable at 34.4 times as on March 31, 2019 (34.8 times as on June 30, 2019). Capitalization of the other fund-based Kotak group entities is also comfortable with the gearing of Kotak Mahindra Prime Ltd and Kotak Mahindra Investments Ltd at 3.8 times and 5.7 times, respectively, as on March 31, 2019 (as per Indian Accounting Standards).
CRISIL believes the Kotak group's capitalisation will continue to be backed by steady internal cash accrual, and will 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 and its management is proactive in handling potential stress in the lending portfolio. While NPAs increased post-merger of erstwhile ING Vysya, they remain comparable with peers in the same rating category. The group's gross NPAs were 1.9% as on March 31, 2019 (2.0% as on June 30, 2019), remaining almost flat compared to 2.0% as on March 31, 2018. The SMA 2 outstanding was also low at 0.07% of net advances as on March 31, 2019 (0.16% as on June 30, 2019). Top wholesale advances are also of a low-risk nature. CRISIL 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.
* Comfortable Earnings: The Kotak group has comfortable earnings, with return on assets (RoA) at 1.99% for fiscal 2019 (1.96%, annualized, for quarter ended June 30, 2019). RoA has improved from 1.6% in fiscal 2016 (dipped because of few merger-related one-off costs and elevated credit costs on account of the acquired portfolio). The group's business is diversified across financial services, ensuring a healthy mix of fund- and fee-based revenue streams. Over the past few years, RoA has become more aligned with lending businesses as this segment accounts for around 80% of profit after tax for fiscal 2019, thereby providing stability to earnings. With benefits from the merger flowing in and credit costs normalising, profitability of the lending business has almost returned to pre-merger levels. With continued traction in the capital markets-related businesses, and steady profitability of the insurance business, outlook for the Kotak group's earnings profile remains comfortable.

The bank has superior liquidity, supported by a sizeable retail deposit base that forms a significant part of the total deposits. Liquidity coverage ratio was 124.9% as on June 30, 2019, 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 Reserve Bank of India, access to the call money market, and refinance limits from sources such as National Housing Bank and National Bank for Agriculture and Rural Development.

Outlook: Stable

CRISIL believes the Kotak group will 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. The outlook may be revised to 'Negative' if the group's asset quality weakens, resulting in decline in earnings and capitalisation. 

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-MFI, was completed during fiscal 2018.

The Kotak group's profit after tax (PAT) was Rs 7,204 crore on total income of Rs 45,903 crore (excluding sub-brokerage) for fiscal 2019, against Rs 6,201 crore and Rs 38,724 crore (excluding sub-brokerage), respectively, for fiscal 2018. For the quarter ended June 30, 2019, the group reported a PAT of Rs 1,932 crore on total income of Rs 12,130 crore (excluding sub-brokerage), against Rs 1,574 crore and Rs 9,904 crore (excluding sub-brokerage) for the corresponding period last fiscal.

KMBL reported a PAT of Rs 4,865 crore on total income of Rs 28,547 crore for fiscal 2019, against Rs 4,084 crore and Rs 23,801 crore, respectively, for fiscal 2018. For the quarter ended June 30, 2019, the bank reported a PAT of Rs 1,360 crore on total income of Rs 7,945 crore, against Rs 1,025 crore and Rs 6,644 crore for the corresponding period last fiscal.

Key Financial Indicators (Kotak Group)
As on/for the quarter ended June 30 Unit 2019 2018
Total Assets Rs crore 3,98,665 3,45,021
Total income Rs crore 12,130 9,904
Profit after tax Rs crore 1,932 1,574
Gross NPA % 2.0 1.9
Overall capital adequacy ratio % 18.4 18.5
Return on assets (annualized) % 1.96 1.84

Any other information

Key features of Kotak Mahindra Bank's Rs 500 crore Perpetual Non-Cumulative Preference Shares (under Basel III)

  • The preference shares are non-convertible, perpetual, unsecured, and Basel III-compliant for inclusion in Tier I capital.
  • Coupon payments shall be annual and non-cumulative.
  • The bank has full discretion at all times to cancel coupon payments.
  • The coupon is to be paid out of current-year profits. However, if current-year profits are insufficient, and payment of coupon may result in losses during the year, coupon payment can be made out of eligible reserves (subject to the bank meeting minimum regulatory requirements for CET-I, Tier-I, and total capital ratios at all times as prescribed by RBI, and subject to requirements of capital buffer frameworks, or credit balance in profit and loss account).
  • Dividend stopper clause as defined in the guidelines is applicable.
  • Loss-absorption features as per RBI's BASEL-III norms are applicable.
    • Instrument will be temporarily written-down upon CET I breaching the pre-specified trigger of 5.5% before March 31, 2019, and 6.125% on or after March 31, 2019.
    • The instrument may be permanently written off at the option of RBI on occurrence of point of non-viability (PONV) trigger.
    • The PONV trigger shall be determined by RBI.
Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
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 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's 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 common equity Tier (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.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of
Rate (%)
Issue Size
Outstanding rating
with Outlook
INE166A08032 Lower Tier II bonds* 14-Dec-12 9.9% 14-Dec-22 306.0 CRISIL AAA/Stable
INE237A08890 Lower Tier II bonds 7-Apr-11 9.31% 7-Apr-21 150.0 CRISIL AAA/Stable
INE237A08908 Infrastructure Bonds 12-Aug-14 9.36% 12-Aug-21 262.0 CRISIL AAA/Stable
INE237A08924 Infrastructure Bonds 14-Jan-15 8.72% 14-Jan-22 500.0 CRISIL AAA/Stable
INE237A08932 Infrastructure Bonds 30-Mar-15 8.45% 30-Mar-22 200.0 CRISIL AAA/Stable
INE237A08940 Infrastructure Bonds 28-Mar-19 8.25% 28-Apr-26 150.0 CRISIL AAA/Stable
NA Infrastructure Bonds** NA NA NA 688.0 CRISIL AAA/Stable
INE237A04014 Perpetual Non-Cumulative
Preference Shares
2-Aug-19 8.10% Perpetual 500 CRISIL AA+/Stable
NA Fixed Deposits NA NA NA NA FAAA/Stable
NA Certificate of Deposits NA NA 7-365 days 17000 CRISIL A1+
*Originally issued by erstwhile ING Vysya Bank
**Yet to be issued
Annexure - Details of Rating Withdrawn
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs.Cr)
INE166A08016 Lower Tier II bonds* 15-Jul-08 10.40% 14-Jul-18 150
INE166A08024 Lower Tier II bonds* 31-Jan-09 9.65% 30-Jan-19 60
INE237A08866 Lower Tier II bonds 09-Jul-07 10.25% 09-May-18 10.8
INE237A09153 Lower Tier II bonds 09-Jul-07 10.25% 09-May-18 25
*Originally issued by erstwhile ING Vysya Bank
Annexure - List of Entities Consolidated
Entity consolidated Extent of consolidation Rationale for consolidation
Kotak Mahindra Prime Limited Full Subsidiary
Kotak Securities Limited Full Subsidiary
Kotak Mahindra Capital Company Limited Full Subsidiary
Kotak Mahindra Life Insurance Company Limited Full Subsidiary
Kotak Mahindra Investments Limited Full Subsidiary
Kotak Mahindra Asset Management Company Limited Full Subsidiary
Kotak Mahindra Trustee Company Limited Full Subsidiary
Kotak Mahindra (International) Limited Full Subsidiary
Kotak Mahindra (UK) Limited Full Subsidiary
Kotak Mahindra, Inc. Full Subsidiary
Kotak Investment Advisors Limited Full Subsidiary
Kotak Mahindra Trusteeship Services Limited Full Subsidiary
Kotak Infrastructure Debt Fund Limited Full Subsidiary
Kotak Mahindra Pension Fund Limited Full Subsidiary
Kotak Mahindra Financial Services Limited Full Subsidiary
Kotak Mahindra Asset Management (Singapore) PTE. Limited Full Subsidiary
Kotak Mahindra General Insurance Company Limited Full Subsidiary
IVY Product Intermediaries Limited Full Subsidiary
BSS Microfinance Limited Full Subsidiary
Infina Finance Private Limited Proportionate Associate
Phoenix ARC Private Limited Proportionate Associate
ACE Derivatives & Commodity Exchange Limited Proportionate Associate
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Certificate of Deposits  ST  17000.00  CRISIL A1+      01-08-18  CRISIL A1+  27-11-17  CRISIL A1+  28-11-16  CRISIL A1+  CRISIL A1+ 
Fixed Deposits  FD  0.00  FAAA/Stable      01-08-18  FAAA/Stable  27-11-17  FAAA/Stable  28-11-16  FAAA/Stable  FAAA/Stable 
Infrastructure Bonds  LT  1112.00
CRISIL AAA/Stable      01-08-18  CRISIL AAA/Stable  27-11-17  CRISIL AAA/Stable  28-11-16  CRISIL AAA/Stable  CRISIL AAA/Stable 
Lower Tier-II Bonds (under Basel II)  LT  456.00
CRISIL AAA/Stable      01-08-18  CRISIL AAA/Stable  27-11-17  CRISIL AAA/Stable  28-11-16  CRISIL AAA/Stable  CRISIL AAA/Stable 
Perpetual Non Cumulative Preference Shares  LT  500.00  CRISIL AA+/Stable      01-08-18  CRISIL AA+/Stable    --    --  -- 
Upper Tier-II Bonds (under Basel II)  LT    --    --  01-08-18  Withdrawal  27-11-17  CRISIL AAA/Stable  28-11-16  CRISIL AAA/Stable  CRISIL AAA/Stable 
All amounts are in Rs.Cr.
Links to related criteria
Rating Criteria for Banks and Financial Institutions
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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