Kotak Mahindra Bank vs RBL Bank: Which is a better long-term investment?

Banks have been in focus lately after most lenders reported strong results for the quarter ended March 2023 (Q4FY23). Overall, banks have been performing well on the back of the expansion of loan portfolios, rise in margins, and improving asset quality.

Amid this strong scenario (especially for banks) and the ongoing March quarter results, let's analyse between Kotak Mahindra Bank and RBL Bank, which private sector lender has better investment opportunities in the long term.

Stock Price Trend

While Kotak Mahindra Bank is up nearly 9 percent in the last 1 year, RBL Bank has advanced 32 percent in the same period. In comparison, the Nifty Bank index has gained 24 percent in this time.

Just in 2023 YTD, Kotak has added 7 percent, rising in 3 of the 5 months so far. It is up just around 1 percent in May so far after a 12 percent jump in April and a 0.2 percent gain in March. However, it shed 0.1 percent and 5.3 percent in Feb and Jan, respectively.

Meanwhile, RBL Bank has lost 14 percent in 2023 YTD, giving negative returns in 3 of the 5 months so far. The stock lost 5 percent in May till date after a 14.6 percent surge in April. However, it fell 9.5 percent in March and 13 percent in Jan as well. It was flat but in the green for the month of Feb.

However, in the long term, both stocks have performed robustly. From its COVID-low of ₹1,001, hit in March 2020, Kotak has advanced 95 percent to currently trade around ₹1,950.

Whereas, RBL Bank has risen 51 percent from its COVID low of ₹101, hit in April 2020, to currently trade around ₹153.

Earnings

In the March Quarter, Kotak Bank reported a 26 percent jump in its standalone net profit to ₹3,495 crore versus ₹2,767 crore in the year-ago period. Meanwhile, its net interest income (NII) increased 35 percent to ₹6,103 crore in Q4FY23 from ₹4,521 crore in Q4FY22. Net interest margin (NIM) came in at 5.33 percent for the full year FY23 and 5.75 percent for Q4 FY23.

The bank's asset quality also continued to improve. Gross NPA (non-performing assets) came in at 1.78 percent and net NPA ratio was 0.37 percent as of March 2023 end.

RBL Bank, on the other hand, posted a 37 percent rise in net profit in the March quarter on the back of higher core income, other income, and lower provisions. Its net profit came in at ₹271 crore in Q4FY23 versus ₹198 crore in Q4FY22. Meanwhile, its NII rose 7 percent YoY to ₹1,211 crore in Q4 and NIM for the same stood at 5.01 percent.

Its asset quality also improved with gross non-performing assets (GNPA) falling to 3.37 percent in Q4FY23 compared to 4.4 percent in the year-ago period. Meanwhile, its net NPA also fell to 1.10 percent in Q4FY23 versus 1.34 percent in Q4FY22.

About The Firms

Kotak Mahindra Bank, founded in 1985, is an Indian banking and financial services company headquartered in Mumbai. It offers banking products and financial services for corporate and retail customers in the areas of personal finance, investment banking, life insurance, and wealth management. It is India's third largest private sector bank by market capitalisation after HDFC Bank and ICICI Bank. As of December 2022, the bank has 1752 branches and 2814 ATMs.

RBL Bank, formerly known as Ratnakar Bank, is an Indian private sector bank headquartered in Mumbai and founded in 1943. It offers services across six verticals: corporate and institutional banking, commercial banking, branch and business banking, retail assets, development banking and financial inclusion, treasury and financial market operations. As of March 2022, it has a network of 502 branches and 414 ATMs.

Which is a better stock?

Most experts have picked Kotak over RBL for better long-term investment opportunities.

Vinit Bolinjkar, Head of Research, Ventura Securities, believes Kotak is stronger than RBL.

"If we compare both the banks over 5 year period i.e. FY18-23, Kotak has shown more resilient numbers than RBL in terms of AUM growth, NIM, net earnings & asset quality if we take the Covid pandemic into perspective. Going forward, we expect that Kotak will continue to outperform RBL," he predicted.

Bolinjkar expects Kotak’s NIM to be stable in the range of 5-5.1 percent by FY26, whereas RBL’s NIM is expected to be 4.5 percent. He further noted that Kotak continues to enjoy higher NIM as a result of its 52.8 percent CASA ratio (which is the highest among its peers). Meanwhile, for RBL, he estimates the CASA ratio to increase by 1-2 percent every year from the current levels of 37.3 percent. Also, branch expansion of Kotak is expected to be more than RBL, he stated, adding that loan growth for Kotak has picked up sharply over the past few quarters as compared to RBL, led by healthy traction in home loans, credit cards & personal loans.

Thus, he believes Kotak provides more long-term investment opportunities in comparison with RBL. As a result of stronger numbers, Bolinjkar expects Kotak to continue demanding strong valuations than RBL with Kotak’s P/Bv to be 3.1 and RBL’s P/Bv to be 0.5 by FY26

Dnyanada Vaidya, Research Analyst, Axis Securities, also prefers Kotak Mahindra Bank from a longer-term perspective.

As per the expert, the bank reported a solid performance in Q4, delivering healthy credit growth, strong NIMs, and improved asset quality. He expects the bank to sustain its growth momentum in the future. Despite NIMs having peaked out, he sees Kotak delivering healthy earnings growth of 16 percent CAGR over the medium term, supported by a largely stable cost structure and muted credit costs backed by solid asset quality.

Rahul Malani, Banking and NBFC Analyst, Sharekhan by BNP Paribas, has also picked Kotak over RBL.

He believes KMB would continue to command premium valuation, given high growth potential, strong assessment capabilities in terms of underwriting, pristine asset quality, good management pedigree and strong track record.

However, he cautioned that in the journey to add scale to its business, some of the matrices like cost-to-income ratios may witness near-term challenges. Kotak is currently trading at 3.1x/2.7x its FY2024E/FY2025E Core BV. The near-term focus would be on the succession plans of MD and CEO as Uday Kotak would be retiring in December 2023. “We cannot comment upon RBL bank as it is not in our coverage,” Sharekhan informed.

Nirav Karkera, Head of Research at Fisdom, also likes Kotak.

"Considering the improvement in the financial metrics of both banks, they can be regarded as viable long-term investments. However, if one needs to choose between the two in the near term, Kotak Mahindra Bank is the better choice, as RBL Bank might face pressure on its bottom line due to its increasing operating expenses as the bank enters its investment phase," he said.

Deepak Jasani, Head of Retail Research, HDFC Securities, as well, stated that they have a ‘Reduce’ rating on RBL Bank and ‘Add’ rating on Kotak Bank.

Given RBK is in an investment phase, opex (branches, people, new businesses) and lagged deposit repricing are likely to keep return ratios muted, he said.

Sonam Srivastava- Founder at Wright Research also believes that while both Kotak Mahindra Bank and RBL Bank offer growth potential, the former appears to have better long-term opportunities. As per the expert, this is because:

Profitability: Kotak Mahindra Bank has reported a strong profit after tax growth (+32 percent) for the March quarter (Q4FY23), while RBL Bank has reported an in-line profit after tax. Kotak's return on assets (RoA) and return on equity (RoE) are higher than RBL Bank's.

Credit growth: Although both banks have shown growth in their credit portfolios, Kotak Mahindra Bank has stronger retail growth (26 percent YoY/6 percent QoQ) compared to RBL Bank. This can be a significant factor in long-term growth potential.

Margins and NIM: Kotak Mahindra Bank has experienced margin expansion and expects a net interest margin (NIM) of more than 5 percent, which should support core profitability. RBL Bank also has improved margins, but Kotak's performance appears stronger.

Valuation: Kotak Mahindra Bank's stock price is valued at a higher price-to-adjusted book value (P/ABV) multiple compared to RBL Bank, indicating that the market has more confidence in its growth potential and long-term prospects.

Management: Kotak Mahindra Bank has a well-established management team and has been consistently performing well. Although RBL Bank has new management with a focus on growth, it might take time to realise its full potential.