IGI Logo

Kotak Mahindra Bank (KMB) continued to report margin contraction (11bps QoQ to 4.9%) due to lower loan asset yields which was due to slower growth in unsecured loans (including full impact of credit card suspension). This, coupled with higher LLP and lower other income led to a 4% miss on PAT at Rs33bn/2.2% RoA. Gross credit growth was healthy at 18% YoY, but sell-off via IBPC for BS management led to lower net credit growth at 15% YoY. Stress in unsecured loans including MFI and Cards has inched-up leading to higher NPAs QoQ to 1.5%; the bank expects some relief by 4Q. Bank continues to draw down specific PCR which reduced to 71% from 75% in Q1, despite peers holding higher specific PCR as well as contingent buffers. Factoring in slower growth and rising NPAs, we cut our earnings estimates by 1-5% over FY25-27E, while we retain our REDUCE rating with TP at Rs1,700 rolling forward on 1.7x Sep26E Standalone ABV and subs/inv value at Rs550/sh. The bank continues to work with external auditors and the RBI to release embargo on new credit card business and general banking customer acquisition through digital channels

Slower growth in unsecured loans lead to further margin contraction

Gross credit growth was healthy at 18% YoY/3% QoQ, but higher sell-off via IBPCs led to net credit growth at 15% YoY/2% QoQ. KMB has accelerated mortgage business growth, but unsecured loans growth including MFI, PL, and Card business took a hit owing to the bank’s cautious stance because of rising NPAs and new Credit Card business suspension by the RBI. This, coupled with higher interest reversal and lower IPO float led to an 11bps QoQ contraction in NIM to 4.9%. To protect its NIM – the bank has recently cut SA rate by 50bps and acquired the high-yielding PL book (Rs41bn) from Standard Chartered Bank. However, given higher share of book linked to repo rate (60%), we believe the bank could be exposed to higher margin risk once the rate-cut cycle begins.

Asset quality deteriorates further as unsecured loan stress inches up

Slippages inch-up further to Rs 18.7bn/2.2% of loans, due to rising stress in unsecured loans (30-40% being from Cards and meaningful jump in MFI as well) led to a 10bps rise in GNPA at 1.5%. Bank remains hopeful of some relief in stress by 4Q. However, we believe that seasoning of the bank’s unsecured loan portfolio including Cards and PL could keep NPAs elevated. Specific PCR continues to slip from 75% to 71% to support profitability, whereas the bank does not carry contingent provision buffer, unlike large peers. Thus, we build-in higher LLP around 0.6-0.9% of loans.

Retain REDUCE with a TP of Rs1,700

Factoring in slower growth and rising NPAs, we cut our earnings by 1-5% over FY25-27E, while we retain our REDUCE rating with TP of Rs1,700 rolling forward on 1.7x Sep-26E Standalone ABV and subs/inv value at Rs550/sh. Bank continues to work with external auditors and the RBI to release embargo on new credit card business and general banking customer acquisition through digital channels. On the recent RBI draft guidelines related to alignment of businesses of banks and their non-bank subsidiaries, the management indicates that it will seek clarification from the RBI in relation to its NBFC subsidiaries.

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354