Kotak Mahindra Bank Q1 Results Review: Deposit Growth, Impact On Margin Key Focus Areas

Kotak Mahindra Bank Ltd.'s pace of deposit accretion and its impact on margin remain key focus areas in the coming quarters, according to brokerages.

"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," Motilal Oswal Financial Services Ltd. said in a note dated July 21.

The private lender's standalone net profit rose 81% year-on-year to Rs 6,249 crore in the three months ended June. This was mainly aided by a one-time gain from divestment of 70% stake in general insurance arm at Rs 3,512 crore and shown as an exceptional item.

Net interest income, or the lender's core income, rose 9.7% year-on-year to Rs 6,843 crore in April-June period. Provisions for the quarter rose 59% to Rs 578.4 crore. Asset quality stayed flat with gross non-performing asset ratio at 1.39% sequentially. Net NPA also stayed flat at 0.35%, compared to 0.34% in the previous quarter.

"The NIM for the bank saw a sharp sequential decline to 5.02% (-26 bps QoQ) on the back of a continued rise in the cost of funds as well as a TD-led deposit growth," Bernstein Research said.

• Healthy loan growth at 19% year-on-year, led by growth in corporate loans and consumer loans.

• Credit costs continued to inch up and stood at 0.55% in Q1, leading to a drag on profitability.

• While impact of the RBI's curbs was not visible on loan growth, the bank did see a slowdown in customer acquisition to approximately 1 million customers in Q1.

• Combination of lower NIM and rising credit costs led to the RoA falling to 2.38%, compared to 2.97% in Q4.

• Maintains a 'market perform' rating with a target price of Rs 1,750 apiece, implying a potential downside of 13.9% from the previous close.

• Sharp NIM decline was due to higher cost of funds and lower share of unsecured loans.

• Share of unsecured loans declined to 11.2% due to the RBI's ban and management caution in some segments where customers were overleveraged with multiple personal loans.

• Interest expenses rose 9% quarter-on-quarter as a high proportion of deposits got mobilised towards the end of Q4.

• Credit costs rose sharply to 57 basis points sequentially because Q4 has a reversal of alternative investment funds worth Rs 1.6 billion.

• Bank's progressing well to address the IT gaps pointed out by the RBI.

• Maintains 'reduce' rating with an unchanged target price of Rs 1,650 apiece.

• Higher credit growth at 19% year-on-year, mainly led by acceleration in low-yield corporate book

• Absence of contingent buffers, unlike large peers, could drive up credit cost in the medium term.

• Despite the RBI's embargo on cards and digital banks, the lender continues to grow at a faster pace in PL/SBL, CV/CE and other retail segments.

• Expects core RoA to decline to 2–2.3% over FY25–27, from 2.5% in FY24.

• Expects core RoE to decline to 12–14% over FY25–27, from 15% in FY24.

• External audit, followed by undertaking corrective measures to the RBI's satisfaction, is a difficult task.

• Maintains 'reduce' rating with the target price raised to Rs 1,700 apiece from Rs 1,625 earlier, implying a potential upside of 4.6%.

• Operating expenses grew within control at 13.9% year-on-year enabling growth in pre-provision operating profit at 6.2% year-on-year.

• Healthy sequential trend in business banking and home loans.

• Modest deposit growth led to an increase in credit-deposit ratio to 87.2%.

• Making efforts to build deposit franchise across all businesses at low cost with sustained growth as most of the repricing has been done.

• Estimates RoA at 2.3% and RoE at 14.3% by FY26.

• Removal of the RBI's ban remains critical for the bank to deliver sustainable growth and earnings.

• Maintains 'neutral' rating with a target price of Rs 1,800 apiece, implying a potential downside of 1%