Buy Kotak Mahindra Bank Ltd For Target Rs.2,100 by Motilal Oswal Financial Services Ltd
Steady performance amid challenging macro; RoA outlook healthy
Asset quality holding up well, with slippages declining QoQ
* Kotak Mahindra Bank (KMB) reported a standalone PAT of ~INR33b (in line; 10% YoY growth). Consol. PAT stood at INR47b (10% YoY growth) in 3QFY25.
* NII grew 10% YoY to INR71.9b (in line). NIM surprised with a 2bp QoQ improvement to 4.93% (vs. our est. of 4.83%), benefitting from a reduction in SA rate. Consequently, total revenue grew 11% YoY to INR98.2b (in line).
* Advances growth was healthy at 15.1% YoY/ 3.6% QoQ to ~INR4.14t, while deposits rose 15.9% YoY/ 2.6% QoQ. CASA mix declined 130bp QoQ to 42.3%.
* Fresh slippages moderated to INR16.6b (from INR18.7b in 2QFY25). GNPA ratio was flat at 1.5%, while NNPA ratio declined 2bp QoQ to 0.41%. PCR improved 175bp QoQ to 73.2%.
* KMB delivered a healthy operating performance amid challenging macro conditions, thusshowcasing its resilience and strategic foresight. The anticipated reversal of the ban on card issuance and the revival of customer onboarding via its advanced online and mobile banking channels are set to act as powerful near-term catalysts. These developments will not only aid business growth but also be pivotal to maintaining healthy margins and revenue growth led by the recovery in synergistic cross-selling avenues.
* We marginally raise our earnings and estimate KMB to deliver FY26E RoA/ RoE of 2.2%/13.5%. After being Neutral on the stock for almost four and a half years when we downgraded KMB at ~INR1,900 (LINK), we are now upgrading our rating to BUY with a TP of INR2,100 (premised on 2.2x Sep’26E).
Business growth healthy; NIM surprises and improves 2bp QoQ
* KMB reported a standalone PAT of ~INR33b (in line; 10% YoY growth) amid better NII, contained opex partly offset by lower other income and higher LLP. Consol. PAT stood at INR47b (10% YoY), we estimate 4QFY25 earnings to be flat YoY/ up 25% QoQ to INR41.2b.
* NII grew 9.8% YoY to INR71.9b (in line). NIM improved 2bp QoQ to 4.93%. Other income grew 14% YoY to INR26.2b (6% miss). Treasury gains stood muted at INR0.3b vs INR0.9b in 2QFY25.
* Opex inched up at 8% YoY/0.7% QoQ to INR46b. C/I ratio declined 22bp QoQ to 47.2%. PPoP grew 13.5% YoY at INR51.8b (in line).
* The loan book grew 15.1% YoY/ 3.6% QoQ. Growth was healthy across the business segments, but for CC, which declined 2% QoQ. Deposit grew 16% YoY/2.6% QoQ, due to faster growth in TD at 5% QoQ. CASA declined 0.4% QoQ, while CA book grew faster at 5% QoQ, supported by IPO flows. In contrast, cuts in SA rates in Oct’24 adversely affected SA growth.
* Fresh slippages declined 11.6% QoQ to INR16.6b with MFI contributing the highest. GNPA ratio was flat at 1.5%, while NNPA declined by 2bp QoQ to 0.41%. PCR increased 1.75% QoQ to 73.2%. SMA-2 advances stood at INR2.1b (5bp of loans). CAR stood at 22.8%, while CET-1 stood at 21.7%.
* Performance of subsidiaries: Kotak Prime’s net earnings declined 9% YoY, while Kotak Securities reported a strong PAT growth of 46% YoY.
Highlights from the management commentary
* Slippages: The MFI segment has contributed significantly to slippages, whereas the secured business is showing a positive trajectory.
* NIMs have stabilized, supported by favorable yields and cost of funds. As the share of unsecured loans increases, yields are expected to improve. On the cost side, CA deposits will help manage and contain expenses.
* The bank aims to achieve a RoA of over 2%, which will depend on when the embargo is lifted and the bank can resume growth efforts.
* KMPL operates in the two-wheeler financing business, whereas the bank does not engage in this segment. As a result, the delinquency patterns differ between the two.
Valuation and view:
Upgrade to BUY KMB delivered strong earnings, driven by higher NII and lower operating expenses, partially offset by a decline in other income and increased credit costs. NIMs improved slightly by 2bp QoQ to 4.93%, supported by robust growth in CA deposits. Although NIMs have faced pressure due to rising funding costs and a decline post the embargo, we anticipate the bank can maintain its margins during a rate-cut cycle, supported by stronger and faster growth in high-yielding assets. Asset quality improved with a decline in slippages. Deposit growth was healthy, fueled by accelerated growth in CA and TDs, while the CD ratio remained at 87.4%. KMB has delivered a healthy operating performance amid challenging macro conditions, showcasing its resilience and strategic foresight. The anticipated reversal of the ban on card issuance and the reinvigoration of customer onboarding via its advanced online and mobile banking channels are set to act as powerful near-term catalysts. These developments not only will support business growth but will also be pivotal to maintaining healthy margins and revenue growth led by the recovery in synergistic cross-selling avenues. We marginally raise our earnings and estimate KMB to deliver FY26E RoA/RoE of 2.2%/13.5%. After being Neutral on the stock for almost four and a half years when we downgraded KMB at ~INR1,900, we are now upgrading our rating to BUY with a TP of INR2,100 (premised on 2.2x Sep’26E, including subsidiaries at INR675).
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