Third-quarter fiscal 2016 earnings for the merged, consolidated Kotak-ING bank were modestly below our expectations.
For the first nine months, consolidated post-tax earnings were at Rs 24 billion, tracking below our full-year estimate on the back of slower noninterest income growth. We still believe that erstwhile ING branches could see improved results by selling more fee-based services post-integration. While we retain our long-term growth estimates and our fair value estimate of Rs 586, we are cutting our 2016 earnings estimate to Rs 40 billion. The stock remains overvalued, trading 12% above our fair value estimate.
On loan growth, the bank continues to perform well, reaching Rs 1.4 trillion loans for the December quarter, closing in on our Rs 1.5 trillion full-year estimate (absolute figures mentioned, as the prior year is not comparable). Net interest margins (at 4.4%) continue to outdo our five-year forecast of 4.2% for this narrow-moat bank. Savings account deposits for the bank continue to increase with strong momentum (at 41% for Kotak branches and 31% at acquired ING branches), as the bank offered to match savings rates for former ING bank savings customers. Current accounts are also seeing good adoption from the nonsalaried customer base that the bank serves. Both of these developments have helped to move the bank's CASA/total deposits ratio to 35% in December, versus 32% last year, prior to the merger.
We still view the merger favourably, as ING branches have the potential to improve their efficiency and Kotak's newly added scale will help the bank reduce its cost/income ratio to 49% by 2020, as per our forecast. The bank will achieve this with cost-saving through back-office integration and generating additional fee income from cross-selling new products to existing ING and Kotak customers. As with all mergers, however, these changes bring near-term uncertainty on Kotak’s earnings, justifying our high uncertainty rating.
