Buy Kotak Mahindra Bank Ltd for the Target Rs.2,400 by Motilal Oswal Financial Services Ltd
Asset quality stress dents earnings
Advances growth healthy; NIM moderates sharply by 32bp QoQ
* Kotak Mahindra Bank (KMB) reported a standalone 1QFY26 PAT of ~INR32.8b (6% miss), due to elevated provisions amid a 22% QoQ increase in slippages. Consol. PAT stood at INR44.7b (down 9% QoQ) in 1QFY26.
* NII grew 6.1% YoY but wasflat QoQ atINR72.6b (in line). NIM contracted sharply by 32bp QoQ to 4.65% (vs. our estimate of 4.8%).
* Advances growth was strong at 14.1% YoY/4.2% QoQ to ~INR4.45t, driven by faster growth in corporate advances (up 10% YoY/11% QoQ), as well as SME. Deposits grew 14.6% YoY/2.8% QoQ, while the CASA ratio declined to 40.9%.
* Slippages jumped 33% YoY/22% QoQ to INR18.1b (INR14.9b in 4Q/INR16.6b in 3QFY25). KMB’s GNPA ratio thusincreased 6bp QoQ to 1.48%, while NNPA rose 3bp QoQ to 0.34%. PCR declined 116bp QoQ to 76.9% for the quarter.
* We cut our earnings by 3.5%/1.4% for FY26E/FY27E amid NIM moderation and slightly elevated provisions. We estimate KMB’s RoA/RoE at 2.1%/13.4% by FY27. Reiterate BUY with a TP of INR2,400 (based on 2.4xFY27E ABV).
Slippages remain elevated due to stress from MFI, retail CV, and Agri
* KMB reported a standalone PAT of INR32.8b (6% miss; down 6.8% YoY and 7.6% QoQ) led by higher-than-expected provisions because of elevated slippages. Consol. PAT stood at INR44.7b (down 9% QoQ) in 1QFY26.
* NII grew 6.1% YoY but was flat QoQ at INR72.6b (broadly in line). NIM contracted 32bp QoQ to 4.65% amid a decline in yields as well as due to a reversal in interest from elevated slippages. Other income declined 3% QoQ (up 5% YoY; 6% lower than MOFSLe), owing to a decline in fee income.
* Opex was down 4.4% QoQ (up 5.7% YoY) to INR47.8b. KMB’s C/I ratio thus contracted 153bp QoQ to 46.2%. PPoP rose 6% YoY/1.7% QoQ to INR55.6b (4% beat).
* Loan growth was healthy at 14.1% YoY/ 4.2% QoQ, fueled by strong growth in corporate banking (up 10% YoY/11% QoQ) and healthy growth in home loans (up 18.7% YoY/3.6% QoQ). BB growth too was healthy at 18.3% YoY/3.9% QoQ.
* Deposit growth was also healthy at 14.6% YoY/2.8% QoQ. CASA deposits dipped 2.2% QoQ (up 8% YoY); as a result, the CASA ratio declined to 40.9% (down 210bp QoQ). TD growth was faster at 19.7% YoY/6.5% QoQ.
* Fresh slippages were elevated at INR18.1b (up 33% YoY/22% QoQ), amid stress from MFI, CV, and agri. Hence, the GNPA ratio rose 6bp QoQ to 1.48%, and the NNPA ratio rose 3bp QoQ to 0.34%. PCR dipped 116bp QoQ to 76.9%. SMA-2 loans rose to INR3.4b/8bp of loans. The CAR/CET-1 ratio stood at 21.8%/ 23.0%.
* Performance of subsidiaries: Kotak Prime’s net earnings grew 17% YoY, while Kotak Life reported an 88% YoY jump in PAT at INR3.3b. Kotak Securities’ reported PAT grew 16% YoY to INR4.7b, while Kotak AMC reported an 86% YoY increase in PAT to INR3.3b.
Highlights from the management commentary
* The bank aims to increase its unsecured retail mix to 15% of the total book. Once credit filters improve, disbursements in MFI will resume.
* Three main reasons for NIM contraction are 1) repo rate cuts, 2) higher unsecured mix, and 3) retail interest recognition based on days (4Q usually benefits from this).
* The JLG model has been replaced with an individual lending model, which has been back-tested with satisfactory loss estimates.
* MFI is expected to recover gradually through FY26, with growth picking up in 2H and credit costs declining; early signs of improving delinquencies are encouraging.
* The full impact of the 50bp repo cut will be visible in 2Q; 1Q reflected only 15 days’ effect. Deposit repricing will play out over 3–4 quarters.
Valuation and view: Reiterate BUY with a revised TP of INR2,400
KMB reported a weak quarter, with NII broadly in line, but NIM contracted sharply by 32bp QoQ to 4.65%, hit by the steep policy rate cuts. Provisions were higher than expected due to elevated slippages, leading to a 116bp QoQ decline in PCR to 76.9%. Management expects NIM to bottom out by 2QFY26, supported by the full transmission of rate cuts, deposit repricing, and CRR benefits, with a recovery likely from 2H. Growth in the unsecured segment is expected to pick up gradually as the lending environment improves, aiding both growth and margin trajectory. Overall loan growth is guided at 1.5–2x nominal GDP, driven by strong momentum in retail and unsecured lending. Deposit growth remains robust, led by healthy traction in term deposits, resulting in a CD ratio of 86.7%. We cut our earnings by 3.5%/1.4% for FY26E/27E amid NIM moderation and slightly elevated provisions. We estimate KMB’s RoA/RoE at 2.1%/13.4% by FY27. We reiterate our BUY rating with a revised TP of INR2,400 (premised on 2.4xFY27E ABV, SoTP of INR762).
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