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Kotak Mahindra Bank (KMB) has shown a decline in performance over the last three years (3Y return: -7.4, 1Y return: -13.3%) compared to the returns of Bank Nifty (3Y return: 37.4%, 1Y return: 11.5%) and Nifty (3Y return: 43.6%, 1Y return: 21.6%). This underperformance can be attributed to several factors, including the stepping down of Mr. Uday Kotak, slower business growth relative to Kotak’s usual standards, and supervisory actions by the RBI. However, the bank has maintained strong asset quality during this period. Looking ahead to FY25, there are indications of a revival, particularly evident in robust deposit growth, which is expected to bolster business expansion given the comfortable Capital to Deposit Ratio (CDR) level at 84%. We anticipate that margins will remain steady in the near term, supported by favourable credit costs. Our estimate for FY26E Return on Equity (ROE) stands at 18.5%, up from the current level of 15.5%, driven by a projected credit growth of 18% CAGR for FY24-26E. Furthermore, the Bank’s valuation is currently at 3(x) trailing Price-to-Book Value per Share (P/BVPS), compared to the 5-Year median P/BVPS of 4.1(x). We believe that there is a strong likelihood of the stock undergoing rerating due to improving return ratios. We recommend a BUY with a target price of ?2124.

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