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RBI lifts key restrictions; growth and profitability outlook strengthens

Consumer business growth to perk up; estimate RoA to sustain at 2.2% for FY26E

* The RBI has lifted the business restrictions that it imposed on Kotak Mahindra Bank on 24th Apr’24 in respect to (i) onboarding of new customers through its online and mobile banking channels, and, (ii) issuance of fresh credit cards.

* The development underscores the regulator’s comfort about the remedial steps taken by the bank to plug the various gaps highlighted by the regulator.

* It also ratifies the bank’s resilience as well as the efficacy and strategic foresight of the new management team to deftly handle such a critical situation that posed grave concerns about the bank, right after several changes in the top leadership team.

* Credit card segment reported softer growth, affected by a moderation in card spends for the industry and the regulatory restrictions on KMB related to the sourcing of new credit cards. The card segment has thus reported 1.7% YoY growth vs. 15.6% YoY growth for the industry and a growth range of 8.2%-17.9% for top four credit card players. KMB’s credit card loan mix thus declined to 3.3% as of Dec’24 from 3.7% in Mar’24. The bank’s market share in o/s cards thus declined to 4.6% in Dec’24 from 5.8% in Mar’24, while its market share in spends declined to 3.6% in Dec’24 from 4.4% in Mar’24. Personal loan segment, however, has still grown at a relatively healthy rate of 10.3% YoY, with the segment accounting for 4.9% of total advances. The unsecured retail mix thus stood at 10.5%.

* Business growth to perk up; estimate KMB to deliver 16% loan CAGR over FY25-27E: Over the past one year, KMB has reported a rather resilient performance, with steady growth and profitability, backed by robust margins. During 3QFY25, its loan book grew 15.1% YoY/3.6% QoQ, led by healthy traction in business banking, CV/CE and home loans. The mix of consumer loans, though, moderated as the wholesale portfolio grew 15% YoY. With the RBI lifting significant regulatory restrictions, we expect business growth and underlying profitability to pick up, with stronger traction in the consumer banking business. This will also support lending yields and margins, which have already compressed to 4.93% from the peak of 5.75% seen during 4QFY23.

* Valuation and view: Reiterate BUY after recent upgrade:

KMB has delivered a healthy operating performance amid challenging macro conditions and the regulatory limitations that it grappled with and deftly worked upon for the early resolution. The development underscores the regulator’s comfort about the remedial steps taken by the bank to plug the various gaps. It also ratifies the bank’s resilience as well as the efficacy and strategic foresight of the new management team to deftly handle such a critical situation, which posed grave concerns about the bank, right after several changes in the top leadership team. The reversal of credit card sourcing ban and the revival of customer onboarding via its advanced online and mobile banking channels will act as a powerful catalyst for business growth. This will thus also be pivotal in maintaining healthy margins and revenue growth, led by a recovery in synergistic cross-selling avenues. After being Neutral on the stock for almost four and a half years, we had recently upgraded our rating on KMB and we maintain our positive view. Reiterate BUY with a TP of INR2,200 (premised on 2.3x Sep’26E).

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