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Potentially Faster NIM Recovery and Growth Pick-up to Aid Re-rating!

Summary

FY25 was a tough year for Kotak Mahindra Bank (KMB) with the regulatory restrictions on digital on-boarding of customers through the 811 channel and issuing new credit cards, hampering credit growth and weighing on margins for most of the year. Despite these challenges, KMB utilised the embargo period to define its go-to-market strategy alongside digitising and automating the customer journey to ensure the easing of banking, while overhauling its tech infrastructure and capabilities. The bank’s focus remained on growing the secured assets while maintaining asset quality. In FY25, despite these challenges coupled with headwinds in the unsecured segments, KMB delivered credit/deposit growth of 13.5/11% YoY. Asset quality challenges were visible in the unsecured segments, while secured segments continued to behave well. Asset quality remained steady in FY25.

Key Highlights

* Financial Performance: As the bank re-worked its growth strategy amidst the embargo and persisting asset quality pain in the unsecured segments, KMB pivoted towards pursuing growth in the secured segments. The bank continued to balance between Savings Accounts, ActivMoney, and Retail TDs to drive deposit growth, while aiming at containing CoF. In FY25, KMB delivered Credit/Deposit growth of 13.5/11% YoY, while maintaining LDR at 85.5% vs 83.8% in FY24. NIM pressures were visible owing to (i) slower growth in the higher-yielding unsecured segments, (ii) increasing CoF and (iii) challenges on CASA deposits. Resultantly, NIMs contracted by 36 bps YoY in FY25, consequently keeping NII growth muted at 9% YoY. Non-interest income grew by 11% YoY, driven by healthy fee income growth (+13% YoY, in line with advances growth). Opex growth was controlled and grew by ~13% YoY, largely in line with business growth despite the investments towards tech overhaul. However, due to a softer top-line growth, the C-I Ratio appeared higher at 47.2% vs 46% in FY24. PPOP grew by 7% YoY. KMB realised a one-time gain from the stake sale in Kotak General Insurance (KGI) of Rs 35.2 Bn, aiding earnings growth for the bank. Credit costs remained elevated in the unsecured portfolio, driven by pressures in the MFI, Personal Loans, and Credit Card portfolio, while they remained under control in the secured/corporate portfolio. Thus, credit costs stood at 0.7% vs 0.5% YoY, partially weighing on earnings. PAT grew by 19% YoY, enabling KMB to deliver RoA/RoE of 2.1/12.6%

* Asset Quality: In FY25, as stress in the unsecured segments surfaced, slippages during the year inched up, with the slippage ratio at 1.6% vs 1.4% in FY24. However, the bank ramped up and strengthened its collection efforts, enabling it to maintain steady asset quality metrics. GNPA/NNPA stood at 1.42/0.31% vs 1.39/0.34% in FY24.

* Operational Review: Risk-weighted Assets (RWA) stood at Rs 5,196 Bn (+14% YoY) and constituted ~75% of Total assets vs. 76% in FY24. The bank continues to remain wellcapitalised with CRAR/Tier I capital of 22.1/21.1%.

Key Competitive Strengths: (a) Strong brand name; (b) Diversified portfolio with gradual shift towards unsecured products, though capped at 15% of portfolio; (c) Strong deposit franchise with a healthy CASA Franchise; (d) Strong capital adequacy; (e) Strengthened digital proposition.

Growth Drivers: (a) Outperformance on NIMs in a declining interest rate cycle; (b) Improving growth trajectory with pick-up in unsecured segments; (c) Strong earnings growth potential; (d) Healthy asset quality with steady credit costs to support healthy earnings growth.

Growth Drivers: (a) Outperformance on NIMs in a declining interest rate cycle; (b) Improving growth trajectory with pick-up in unsecured segments; (c) Strong earnings growth potential; (d) Healthy asset quality with steady credit costs to support healthy earnings growth.

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