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Top-line growth momentum continues: Kotak Mahindra Bank net interest income increased by 4.1% QoQ/15.9% YoY as the bank managed to sustain its net interest margin on a sequential basis at 5.2%. Interest earned increased by 5.4% QoQ/31.1% YoY while fees income also grew at a healthy rate of 5.8% QoQ/16.1% YoY. Interest expended grew by 7.1% QoQ/56.8% YoY as cost of deposits continued to increase during the quarter. Operating expenses remained elevated driven by increase in employee cost of 7% QoQ/18.3% YoY along with increase in provisions by 58% QoQ/289.1% YoY leading to decline in profit before tax on sequential basis by 6% QoQ.

Retail and corporate leading advances growth: Advances growth excluding IBPC remained strong at 4.3% QoQ/18.9% YoY. The growth in advances was mainly led by corporate banking (2.9% QoQ/16.4% YoY) and retail segment growth. The unsecured lending for the bank saw a sharp increase especially segment such as personal loans (8.1% QoQ/32.8% YoY) and credit card (10.2% QoQ/51.6% YoY). Commercial vehicles segment leading also saw an increase of 8.7% QoQ/30.7% YoY owing to healthy growth in commercial vehicles finance. Overall, unsecured segment increased by 9% QoQ/40% YoY. The management remains confident of its unsecured lending portfolio and credit quality remained intact.

Margins sustained on QoQ basis: Net interest margin during the quarter was 5.2% which declined by 25bps YoY, however, the bank managed to maintain its margin on QoQ basis mainly due to increase in unsecured loans with high yield assets. Going forward, the bank expects that the margin will remain at similar levels.

Term deposit led deposits growth: Deposits for the month of December increased by 1.9% QoQ/18.6% YoY mainly due to term deposits. TD Sweep products continues to see traction with a growth of 12.5% QoQ/74.9% YoY being the main driver of term deposit and over deposits. Owing to increase in term deposits in the overall mix, the CASA ratio declined by 52bps QoQ/553bps YoY.

Asset quality remains intact: Credit cost during the quarter was 40bps as against 47bps in Q2FY24. Also, GNPA/NNPA declined by 17bps/9bps YoY indicating that the asset quality remained intact. Slippages declined by 10.3% QoQ. The bank remains prudent in credit disbursals in unsecured products. During the quarter provisions and contingencies increased by 58%/289.1% YoY due to one-time provisions on RBI’s regulation on provisions relating to AIFs

Valuation and outlook: We remain positive on Kotak Mahindra Bank as the bank has seen healthy credit growth, while deposits growth also remain strong led by term deposits. The bank has managed to sustain its margins on QoQ basis and expects margins to improve going forward. The bank is able to drive customers into the bank as total customer count increased by 4.8% QoQ/23.1% YoY to 48 Mn. We expect NII/ PPOP/PAT to grow at a CAGR of 21.6%/22.7%/20.1% over FY23-26E. We maintain Buy rating on Kotak Mahindra Bank while increasing our target price to Rs 2,126 valuing the bank at 2.5x of its FY26E Adj. BV.

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