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Kotak Mahindra Bank (KMB) reported weak 1Q results with an 8% miss on PAT, which came in at ~Rs33bn, and 1.9% RoA (the lowest in the last 11 quarters) due to sharp margin contraction and higher provisions. KMB delivered higher credit growth at 14% YoY, with heavy lifting done by the low-yielding corporate book. This, coupled with lending rate cuts, led to a steep 32bps QoQ margin contraction to 4.7%. The management expects margin pressure to persist in 2Q as full impact of the 50bps repo rate cut sinks in, albeit to gradually stabilize and improve thereafter, as cost reduction (including SA cost) flows through. Asset quality too deteriorated, with slippages jumping to 1.9% due to stress in MFI, retail CV, and KCC loans. The mgmt indicated retail CV stress would persist ahead, while MFI has largely peaked. Factoring in the 1Q earnings miss, we trim FY26-27E EPS by 4-5% and expect RoA to settle at ~2%. We retain REDUCE on KMB with unchanged TP of Rs1,950, given the rich valuations (2.1x FY27E ABV) and relatively sub-optimal return ratios (RoE@11-12%) vs large peers.

Healthy growth, though margin sinks KMB reported healthy credit growth of 14.1% YoY/4.2% QoQ, mainly led by corporate loans (up 11% QoQ) and healthy traction in home loans, BB, and agri (each up 4% QoQ). However, the cards/MFI portfolios declined 4%/12% QoQ, respectively, amid a stressed environment. The mgmt remains cautious about the retail CV segment amid continued stress, while it expects a gradual recovery in MFI in H2. KMB expects its PLs to grow and is expanding its credit card portfolio with new launches (Solitaire, Indigo), though the mgmt would adopt a calibrated growth approach in the near term. The sharp SA rate cut reflected in the SA portfolio, which declined 3% QoQ; CASA ratio was down by 210bps QoQ to 41%. NIM fell sharply by 32bps QoQ to 4.65% and is expected to contract further in Q2, reflecting full impact of the 50bps repo cut. However, a 75bps reduction in funding cost will flow through over the next 3-4 quarters and hence support margins in 2H.

Asset quality, PCR slip as MFI stress hurts Gross slippages (led by MFI, retail CV, and seasonal rural stress) inched back QoQ to Rs18bn/1.9% of loans, resulting in increase in GNPA ratio to 1.5%. The mgmt indicated that stress in the MFI segment has peaked and expects it to ease ahead. In Cards, the bank undertook a clean-up of inactive accounts, with delinquencies now stabilized and credit costs expected to decline in H2. PL credit cost stabilized in Q4, supported by steady flow rates and collections. However, stress in the retail CV segment may persist for another quarter, although underwriting has been tightened to mitigate risks. KMB is still watchful of the SME segment, although it does not see any immediate risk.

We retain REDUCE We trim our earnings estimate by 4-5%, and retain REDUCE with unchanged TP at Rs1,950, valuing the standalone bank rolling forward on 1.8x Jun-27E ABV and subs at Rs630. Key risks to our rating/estimate: Earlier than expected recovery in margin/asset quality.

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