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Notwithstanding the sharp dip in NIMs (35bps QoQ) to 5.2%, KMB reported in-line PAT of Rs31.8bn/RoA of 2.5%. We believe the RBI’s recent rebuke on unsecured loans (11% of loans) could slightly weigh on growth/margin. Further, KMB’s Covid provision buffer stands low at 0.2% of loans vs 0.6-1.2% for peers and thus calls for higher provisions. We trim our estimates for FY25-26 a tad, and expect the bank to report moderate RoA/RoE of 2.1%/13%, respectively. The RBI has surprisingly given approval for the appointment of Ashok Vaswani (ex-Citi/Barclays), who has expertise in the Consumer, Corporate and Digital Banking space and has superseded KMB’s internal candidates (EDs). As the bank’s new MD & CEO, Mr Vaswani has the tall task of managing senior-management attrition/business dislocation (typically seen post top-management changes in banks) and filling the larger shoes of ex-CEO Uday Kotak. Factoring-in management transition-related risks, we cut TP multiple to 2.6x Sep-25E ABV from 2.8x Jun-25E ABV for the core bank and value the subsidiary at Rs480/share, leading to TP of Rs1,955/share (earlier Rs2,000) for KMB. We retain HOLD on the stock. The RBI not having yet objected to Uday Kotak’s non-executive, non-independent board seat should provide some relief, though.

Healthy growth, but margin sharply shrinks as CoF catches up

including unsecured loans, which contribute 11% of the loan portfolio (8.7% of loans). KMB expects growth to remain strong and is also determined to grow its unsecured book amid the rising risk on stress. Bank has recently acquired UP-based MFI Sonata Finance (as its business correspondent subsidiary), to bolster its MFI book (AUM: Rs19bn) and thus drive-in higher margin. Deposit growth too has been strong, at 23% YoY, but CASA slipped to 48% from the high range of the 50s and thus weighed on CoF. NIM contracted by 35bps QoQ to 5.2%, mainly due to the higher CoF. Going forward, margins could remain under pressure, in our view, as CoF continues to stay in catch-up mode, as do peers.

Slippages remain elevated, while contingent provision buffer negligible amid rising risk on unsecured loans

Slippages were higher than expected at Rs13bn/1.8% of loans for a second quarter in a row, due to grossing up of NPAs during the quarter, but better recovery/upgrades and credit growth led to slight improvement in GNPA ratio by 5bps QoQ to 1.7%. The restructured pool also declined, to Rs5.2bn/0.2% of loans (0.2% in 1Q)—the lowest among large peers. The bank continues to pull down its contingent buffer, which now stands at Rs3.2bn/0.1% of loans—one of the lowest among large banks. We believe the bank needs to shore-up the contingent buffer, given rising risk in unsecured loans and its otherwise unseasoned card/PL/CD portfolio. In addition to this, we expect the RBI to initiate action post the festive season, to curb undeterred growth in unsecured loans (mainly low-value), which would thus call for elevated provisioning.

The RBI clears Ashok Vaswani as the new MD & CEO, who has a big task on hands

In a surprising move, the RBI cleared the appointment of Ashok Vaswani as the MD & CEO of KMB, wef 1-Jan-2024 for three years, superseding the internal candidates (EDs). It is unclear if Mr Vaswani was the bank’s preferred recommendation or his appointment is an unanticipated RBI decision. Notably, Mr Vaswani has a long & rich work experience in the Consumer, Corporate and Digital Banking arenas, given his long stint with global banks like Citigroup and Barclays as well as his recent leadership role in a US-Israeli AI firm. We believe the new MD & CEO has a tall task on his hands to manage senior management attrition/business dislocation, if any, typically seen post top-management changes in banks; meeting investors’ high expectations as did the outgoing MD & CEO Uday Kotak is another cap to don for Mr Vaswani. However, there is some spot of relief for investors, as the RBI has not yet raised any objection to Uday Kotak’s non-executive, non-independent board seat.

We retain HOLD

We expect KMB’s RoA/RoE to normalize to 2.1%/13% from the highs of 2.4%/14.5% in FY23 due to margins/LLP normalization. Factoring-in management transition related risks, we lower our TP multiple to 2.6x Sep-25E ABV from 2.8x Jun-25E ABV for the core bank and value the subsidiary at Rs480/share, leading to TP at Rs1,955/share (earlier Rs2,000/share). Thus, we retain HOLD on the stock. Downside risks: Difficulty in mobilizing low-cost deposits, Management attrition and asset-quality risk in the unseasoned unsecured loan book.

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