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In-line adjusted earnings; asset quality ratios broadly stable Margin declines sharply by 26bp QoQ

* Kotak Mahindra Bank (KMB) posted a standalone PAT of ~INR62.5b in 1QFY25, aided by an exceptional gain of INR27.3b (net of tax) from divestment of its 70% stake in Kotak Mahindra General Insurance to Zurich Insurance. Adjusted PAT was in line at INR35.2b (2% YoY growth).

* NII grew 9.8% YoY to INR68.4b (4% miss) as NIMs moderated 26bp QoQ to 5.02%. Other income grew 9.2% YoY to INR29.3b (4% miss). Total revenues thus grew 9.6% YoY.

* Advances grew 18.7% YoY/3.7% QoQ to INR3.9t, while deposits grew 15.8% YoY (flat QoQ). CASA mix moderated 210bp QoQ to 43.4%.

* Fresh slippages increased 4% QoQ to INR13.6b. GNPA/NNPA ratios stood stable at 1.39%/0.35%. PCR declined 104bp QoQ to 74.9%.

* We fine-tune our earnings estimates; we estimate KMB’s RoA/RoE at 2.3%/14.3% by FY26. Reiterate Neutral with a TP of INR1,800 (based on 2.0x FY26E ABV + INR575 for subs).

Loan growth steady; CD ratio rises ~340bp QoQ on flat deposit base

* KMB reported a standalone PAT of ~INR62.5b, aided by an exceptional gain of INR27.3b (net of tax) from the sale of its 70% stake in Kotak Mahindra General Insurance to Zurich Insurance. Adjusted PAT was in line at INR35.2b (2% YoY growth). Consolidated PAT stood at INR74.5b (INR 44.4b, excluding exceptional gains).

* NII grew 9.8% YoY to INR68.4b (4% miss) as NIMs moderated 26bp QoQ to 5.02%. Other income grew 9.2% YoY to INR29.3b. Treasury gain was INR1.05b vs. INR1.4b in 4QFY24.

* Opex growth was under control at 13.9% YoY (4% lower than MOFSLe), enabling 6.2% YoY growth in PPoP to INR52.5b (in line). C/I ratio thus increased 147bp QoQ to 46.2%.

* Loan book grew 18.7% YoY (up 3.7% QoQ), led by healthy traction across segments. KMB reported a healthy sequential trend in business banking and home loans. Deposit saw modest growth at 15.8% YoY (flat QoQ). CASA mix moderated 210bp QoQ to 43.4%.

* Fresh slippages increased 4% QoQ to INR13.6b. GNPA/NNPA ratios were stable at 1.39%/0.35%. PCR declined 104bp QoQ to 74.9%. SMA-2 advances stood at INR2.32b (6bp of loans). CAR stood at 22.4%, while CET-1 was 21.3% in 1QFY25. KMB reported an increase of INR34.14b in reserves pursuant to the implementation of revised investment guidelines by the RBI.

* Performance of subsidiaries: Kotak Securities reported net earnings growth of 82.6% YoY, while KIL reported PAT growth of 35.3% YoY

Highlights from the management commentary

* In terms of network expansion, KMB opened 150 branches last year and aims to add a similar number of branches this year as well.

* A moderation in unsecured advances growth affected the yield, but the bank expects unsecured lending trajectory to sustain mid-teen growth.

* KMB is making efforts to build the deposit franchise across all of its businesses and get deposits at low cost with sustainable growth. Most of the repricing has been done.

Valuation and view

KMB delivered a mixed quarter as earnings came in line with estimates (aided by controlled opex) and margins contracted significantly by 26bp QoQ. The asset quality ratios remained stable, while slippages rose slightly. Moderate growth in unsecured advances affected the yields, but the management continues to guide for mid-teens growth in unsecured lending. Growth in deposits has been modest, leading to an increase in the CD ratio to 87.2%. Amid heightened competition for deposits, we remain watchful on the pace of deposit accretion for the bank and the impact on margins over coming quarters. KMB has posted healthy performance despite the RBI ban on its digital sourcing and restriction on new card issuance. We believe that the removal of the ban remains critical for the bank to deliver sustainable growth and earnings. We fine tune our earnings estimates and expect KMB’s RoA/RoE at 2.3%/14.3% by FY26. Reiterate Neutral with a TP of INR1,800 (based on 2.0x FY26E ABV + INR575 for subsidiaries).

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