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Strong earnings beat, but CASA continues to retreat

Kotak Mahindra Bank (Kotak) reported a huge 28% beat on PAT (which stood at Rs41bn), mainly on treasury gains/debt syndication fees, reversal of AIF provisions (Rs1.6bn), and lower tax rate @21%. Its CASA ratio has slipped by 1,500bps in the last 2Y to 45.5%; this, coupled with the recent RBI embargo on digital customer sourcing (incl. Kotak 811) and slower branch expansion vs peers, could further hurt the bank amid the raging war for retail deposits. Also, ban on new card sourcing will hurt mkt share/revenue, more so in the medium term, as seen in HDFCB. Mgmt guides to PBT impact of Rs3-4.5bn (3% of FY25E PBT) due to the RBI embargo, but we believe impact on the business/financials would be far more widespread, unless resolved soon. Thus, we cut FY25E-27E growth by 200bps and expect the RoA/RoE trajectory to slip to 1.9-2.3%/13- 14%, on higher opex/provisions. Higher attrition (incl. in KMP) and Bank’s strategy to reduce provision buffers vs peers amid rising asset-quality noise, adds to our concerns. We retain REDUCE with TP cut to Rs1,625/sh (Rs1,750 earlier), valuing the SA bank at 1.8x FY26E ABV and subsidiary at Rs525/sh.

Regulatory embargo to hurt business growth; CASA continues to retreat

Kotak reported strong credit growth of 18% YoY/5% QoQ, backed by robust growth in the corporate/commercial banking business and the retail segment. Retail loans grew 22% YoY/6% QoQ, with CV and mortgages being the primary catalysts, whereas share of unsecured retail loans increased to 11.8%. Though the bank has accelerated deposit growth, CASA ratio continued its downward trajectory and fell by 223bps QoQ (by 1,500bps in the last 2Y) to a low 46%. As per Management, the RBI order to stop onboarding new online/credit card customers is expected to hit PBT by Rs3-4.5bnpa, but we believe impact on the business/financials could be far higher, as seen in HDFCB. Management remains hopeful of resolving the RBI’s concerns that ultimately led to the current embargo, but we believe that fulfilling the RBI’s requirement—for external audit followed by corrective measures to the Regulator’s satisfaction—for lifting the ban, is a task easier said than done.

Higher write-offs led to sharp fall in NPAs; but PCR also falls

Slippages were slightly higher at Rs13.1bn/1.6% of loans due to stress in select areas owing to unseasonal rains, but higher write-offs including unsecured loans to the tune of Rs14.6bn caused a 34bps QoQ decline in GNPA to 1.4%. However, NNPA remained flat at 0.3% of loans, while Bank’s specific PCR fell to 76%, which is relatively lower than peers’. Bank has also largely consumed its contingent provision buffer, whereas peers carry buffer of ~0.6-1.2% of loans amid rising asset quality risk in the unsecured retail loan space. The new Management believes that it is well provided for, for the risk, and thus does not see any need for building buffers.

We retain REDUCE, reducing our TP to Rs1,625/share

The new Management has decided to focus on the 4Cs: i) Customer centricity, ii) Colleague (hiring and retaining appropriate talent), iii) Company (Scale with profitability) and iv) Community (satisfying all stakeholders, including regulators). But we believe that the bank also needs to put a strategy in place for managing the 2Cs of CASA ratio and Cost (Operational and Credit). Higher attrition, including in key managerial personnel (KMP), and Bank’s strategy to reduce provision buffers vs peers, adds to our concerns. We retain REDUCE on the stock with revised down TP of Rs1,625/share (earlier Rs1,750), valuing the standalone bank at 1.8x FY26E ABV and subsidiary at Rs525/share.

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