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Normalisation of business model to take time

Our view – SA traction and digital ban 2 key issues to grapple with

Net Interest Margin - NIM declined sequentially, impacted by challenges in CASA and slowdown in unsecured lending: NIM was at 5.02%, down -26bps QoQ and -55bps YoY. Management seemed to concede that the margin 2 quarters back, which was 5.22%, was not sustainable and now the bank is 20 bps below that. However, deposits have largely repriced, and rates have also stabilized.

Asset Quality - There was a slight sequential rise in slippages, with the management flagging emerging stress in certain segments: Gross NPA additions amounted to Rs 13.58bn for 1QFY25, translating to an annualized slippage ratio of 1.40% for the quarter. Gross NPA additions had amounted to Rs 13.05bn during 4QFY24. Stress has emerged in unsecured retail, especially in credit card dues of low-ticket size and where the customer has gotten over-leveraged. There is stress in the microfinance business in select geographies.

Balance sheet growth -Period-end deposit growth outcomes were worse than average deposit growth outcomes. Corporate loans drove loan growth: The deposits were at Rs 4,474bn, down by -0.3% QoQ but up 15.8% YoY. However, the average deposits were up 21% YoY and 7% QoQ. The advances for the bank stood at Rs 3,941bn, up by 3.7% QoQ and 18.3% YoY. During the quarter, the corporate banking business contributed significantly to loan growth. Unsecured retail was slow due to the ban on credit card addition, lack of digital personal loan journey and slower microfinance lending.

Regulatory Update –

The RBI is yet to lift the embargo on digital business but KMB is working in the background to rectify this: As per management, the bank has made substantial progress with regard to rectifying the situation after the RBI order. Various tech initiatives have been undertaken and the bank has put together a plan in this regard. The extra cost emerging due to rectifying the IT embargo is in line with initial guidance. We maintain a relatively cautious ADD on KMB with an unchanged price target of Rs 2075: We value the standalone bank at 2.2x FY26 P/BV for an FY25E/26E RoE profile of 13.2%/13.7%. We assign a value of Rs 699 per share to the subsidiaries, on SOTP. (See Comprehensive con call takeaways on page 2 for significant incremental colour.)

Result Highlights (See “Our View” above for elaboration and insight)

* Opex control: Total opex grew 2.1%/13.9% QoQ/YoY, staff cost grew 2.4%/13.6% QoQ/YoY and Other expense grew 1.8%/14.1% QoQ/YoY

* Fee income: Fee income de-grew/grew -9.2%/22.6% QoQ/YoY, driven lower sequentially by Distribution Income

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