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After a sharp drop in Q2, the bank sustained its NIM at 5.2% in Q3, but reported a miss in earnings (5%) with PAT at Rs30bn, mainly due to MTM hit on bonds and higher AIF provisions (Rs1.9bn). Credit growth moderated to 16% YoY/3.3% QoQ, mainly due to a slowdown in corporate/commercial banking. However, retail growth remained healthy, including unsecured loans (share @11.6% of loans), which coupled with better loan yields/LDR led to stable NIMs. The bank cleaned up its lowvalue card portfolio, leading to slower CIF growth, but it does not see any immediate asset-quality stress. The bank has announced the acquisition of Sonata (NBFC-MFI) and has reduced its stake in Kotak Gen Insurance to 49% via a mix of capital infusion/share sale to Zurich Insurance. The new MD and CEO, Ashok Vaswani, has joined the bank, who we believe will have a tall task managing senior-management attrition/business dislocation (if any) and hopefully review the bank’s strategic stance on business/branch expansion, investment portfolio rejig given a higher share of AFS, sub-optimal dividend/capital consumption policy, stake reduction in subs and so on. We retain ADD with a TP of Rs1,950/share, implying 2.5x Dec-25E core Bank ABV and subs value at Rs480/share.

Growth dips, but not margins

Credit growth moderated to 16% YoY/3.3% QoQ on account of slower growth in the corporate/commercial banking business. However, retail growth remained strong, including unsecured loans, whose share now stands high at 11% of loans. The bank has cleaned up its low-value card portfolio, leading to slower CIF growth. The bank has recently acquired UPbased MFI Sonata Finance (as its business correspondent subsidiary) to bolster its MFI book (AUM: Rs19bn), which should help lead to better margins. Deposit growth also moderated to 19% YoY/1.9% QoQ, leading to higher LDR at 88%, which along with increased loan yields due to higher growth in unsecured loans led to near stable NIM at 5.2% after a sharp drop in Q2.

NPAs hold up; healthy specific PCR but running low on contingent buffer

Slippages moderated QoQ to Rs11.8bn/1.5% of loans, but lower write-offs led to a 5% QoQ increase in absolute NPAs and, thus, broke the GNPA ratio decline trend. The restructured pool also declined further to 0.1% of loans – the lowest among large peers. The bank continues to pull down its contingent buffer, which now stands at Rs3.2bn/0.1% of loans – one of the lowest among large banks. We believe the bank needs to shore up the contingent buffer, given the rising risk in unsecured loans and it’s otherwise unseasoned card/PL/CD portfolio.

Retain ADD, but will be watchful of the new management’s strategy

We expect KMB’s RoA/RoE to normalize to 2.1%/13% from the highs of 2.4%/14.5% in FY23 due to margins/LLP normalization. We believe the new MD and CEO, Ashok Vaswani, will have a tall task of managing senior-management attrition/business dislocation (if any) and hopefully review the bank’s strategic stance on business/branch expansion, investment portfolio rejig given the higher share of AFS, sub-optimal dividend/capital consumption policy, stake reduction in subs and so on. We retain ADD with a TP of Rs1,950/share, implying 2.5x Dec25E core bank ABV and subsidiary value at Rs480/share. Downside risks: Managing growth/asset quality amid rising risk in unsecured loans, deposit mobilization amid sub-optimal branch base, and senior management attrition.

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