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Levers in place for better than expected core RoA

We met the MD&CEO and senior management of KMB and key takeaways were (1) bank may continue to grow faster than system without compromising on NIM (2) unsecured growth has resumed but secured growth would not be impeded; unsecured share may increase from ~9% in Mar’26 to 11-11.5% and (3) tech investments would further drive operating efficiency, reducing opex/assets. Bank has de-risked its balance sheet which may not be a negative since despite our flat NIM estimates over FY26-28E, opex/assets & provisions could be lower. LCR at 134% would support growth in a tight credit cycle. With core PAT CAGR of 17%, we expect core RoA to enhance over FY26-28 from 1.76% to 1.85%. We keep multiple at 2.0x on FY28 core ABV and TP at INR 480. Retain ‘BUY’.

Balance sheet strategy–a four pronged approach:

This includes

(1) structurally aiding CASA mobilization with affluent (Solitaire) driving high-value deposits, 811 contributing to granular SA and custody franchise supporting CA

(2) customer segment-based expansion

(3) product diversification

(4) strong push towards automation/digitization. Bank has resumed calibrated expansion in unsecured, with disbursals picking up QoQ, focusing initially on absolute growth while continuing to scale the secured portfolio. Share of unsecured is guided to increase to 11-11.5% from 8.9% as of Q4FY26.

Upside risks to our NIM estimates:

Driven by the bank’s nimble strategy on deposits, CA and fixed rate SA combined on an average basis grew by 17.4% YoY; its share enhancing by 80bps YoY to 34.8%. Also, growth has resumed in the unsecured segment albeit with stronger guardrails. Hence, NIM is expected to be supported by improving mix and pricing, as a gradual increase in unsecured lending will aid yield uplift, while competitive intensity has moderated post Q4, leading to better pricing discipline and lending rates. We are factoring flat NIM of ~4.2% over FY26-28E which could see upside risks.

Technology to remain a cornerstone; focus on opex/assets reduction:

Tangible benefits from sustained technology investments (~13% of opex) are visible, with automation contributing to cost/assets reduction from 3.06% in FY24 to 2.65% in FY26. Efficiency is also reflected in the ability to grow the balance sheet without increasing headcount. Cost optimization efforts have primarily been focused on reducing fixed costs related to payroll and branch & ATM infrastructure. Bank expects that opex/asset ratio reduction will continue to be a key RoA driver; we trim opex to assets by 3/5bps in FY27/28E.

Downside risks to our provision estimates:

Bank indicated that in event of a prolonged middle-east conflict, large corporates are better placed given stronger balance sheets while any stress is likely to originate sooner from SMEs. Asset quality trends remain stable with no visible strain on bounce rates. The bank has become more cautious in SME lending by increasing scrutiny level (moving from L1 to L2 approval) to proactively monitor risks. With asset quality risks from unsecured abating and strong guardrails in place, upcoming credit cycle could favor KMB; provisions over FY26-28E could be lower to our estimates of 60-65bps (FY25/26 at 73-75bps).

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