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Better growth/NIM key to re-rating

KMB saw a good quarter as better fees, opex and asset quality led to core PAT beat of 8.8%. Due to asset quality pressure that impacted FY25/26 PAT, bank seems to have tweaked its strategy of increasing unsecured mix; its share may rise at a slower pace since as per the bank, secured growth would not be sacrificed. Hence, reported NIM is guided to remain flattish in FY27E vs FY26 levels (4.6%). Fee growth that was weak in FY26 (6.5%) could pick-up in FY27 that may result in opex increase too. Lower NIM for FY27/28E would be more than offset by lesser opex. We cut multiple to 2.0x but roll forward to FY28 core ABV; trim TP to INR 480 from INR 500. Retain ‘BUY’.

Good quarter; beat on fees, opex and asset quality:

NII was INR 78.8bn (PLe INR 79.1bn); NIM (calc.) was a miss at 4.4% (PLe 4.5%) due to higher liquidity; adjusted for day count convention reported NIM was flat QoQ at 4.54%. Credit/deposit growth were in-line at 16.2%/14.7% YoY. LDR fell to 86.6% (88.6% in Q3’26); CASA ratio was stable at 41% (41.3% in Q3’26). Other income was a 3.4% beat at INR 31.2bn due to higher fees at INR 27.7bn (PLe INR 26.3bn). Opex at INR 51.4bn was largely in-line; lower staff cost was offset by higher opex. Core PPoP was 2.5% higher at INR 55.1bn; PPoP was INR 58.6bn. Asset quality improved; GNPA was lower 1.2% (PLe 1.3%) due to lower slippages at INR 10.2bn (PLe INR 16.6bn) leading to lesser provisions. Core PAT was an 8.8% beat at INR 37.6bn; PAT was INR 40.3bn.

Loan growth was led by SME/agri:

Credit growth was lesser to peers at 3.2% QoQ mainly led by slower corporate accretion (+0.2%). Loan growth was healthy in BuB (+5.5%), agri (+5.8%), SME (+5.3%), HL (+4.4%) and MFI (+8.4%). Credit accretion in FY26 was largely led by secured segments and bank would not slow the pace of secured growth to increase share of unsecured. Also, NIM for FY27E is guided to be at a similar level to FY26 (4.6%), suggesting that bank has de-risked the balance sheet to protect asset quality. We see loan growth by 15% each for FY27/28E.

NIM cut to be more than offset by opex/provision reduction:

Fee growth was muted in FY26 (+6.5% YoY) due to 8.5% YoY decline CC book; however, fee growth may match balance sheet increase in FY27E that would result in opex accretion (+4.2% YoY in FY26). Despite lower provisions in Q4’26, PCR rose by 271bps QoQ to 79%. One-time ECL impact may be <2% of equity with no material effect on sustainable credit costs. We are factoring provisions of ~60bps in FY27/28E.

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