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NIMs surprise, focus more on direction

Core better than estimated; change of guard to usher in new vistas

Kotak Mahindra Bank’s (KMB IN) Q3 PAT at INR 30bn was marginally below our estimates. While NII was better than estimated (NIMs flat QoQ at 5.22% versus our expectations of drop, better than peers), higher opex (up 7% QoQ) and higher provisions restricted PAT. Earnings aside, we believe near-term discussions are more likely to be centered around the new CEO’s strategy, possibilities of management change and other softer aspects than on critical earnings aspects (of core delivery, liability movement etc.). While overall earnings are steady, improvement triggers seem limited. Rich valuations, amidst uncertainty, leave little room for maneuvering.

NIM better-than-expected, growth-profitability balance, the key

NIMs surprised positively, flat QoQ at 5.22% versus our expectations of a drop. This was largely led by shift in earning assets to advances, thus benefiting overall yields. We, however, believe that headwinds are likely given continued deposit pressure and limited yield benefits. The lowcost franchise is being cannibalized (momentum in Active Money), with related bearing on cost. Meanwhile, loan growth was steady at 4% QoQ, which aided NII (up 4% QoQ). We believe growth sustainability is crucial, given current rate dynamics and KMB's low-risk threshold. NIM may be strained, and credit cost below normalized levels. Outlook may be more demanding hereon for KMB (base already high).

Asset quality, a non-issue; no major red flags visible

KMB has sustained steady asset quality, with GNPL at ~1.73% and NNPL at 0.34%. Slippages were at INR 11.8bn, of which INR 2.9bn was upgraded in Q3FY24. The credit cost was higher as KMB provided INR 1.9bn on AIF. Restructured loans of13bps and SMA-2 of INR 2.1bn have led to an overall stress pool of sub-2.0%. KMB does not see any red flags, but normalizing trends on credit cost are visible.

Valuations: Reiterate Accumulate; TP revised to INR 2,004

The change of guard at KMB has been a long-standing overhang. Hereon, the focus will be more on softer aspects than earnings delivery. Historically, such transitions have been choppy for others and thus, we expect near-term uncertainty for KMB (with certain price risks). KMB is likely at peak earnings and this transition may add to uncertainty, thus keeping re-rating in check. We introduce FY26E estimates and roll over to September 2025E, leading to raised SoTP-TP of INR 2,004 (from INR 1,924). Maintain Accumulate.

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