Kotak Mahindra Bank- Quarterly Result Update

Sector Outlook – Neutral

In Q2FY24, Kotak Mahindra Bank (KMB) witnessed mixed financial results. Net Interest Income (NII) reached Rs 6,297 crores, growing marginally by 1.0% QoQ and impressively by 23.5% YoY. However, Pre-provision operating profit (PPOP) declined by 6.9% QoQ but still registered a robust 29.2% YoY growth, standing at Rs 4,610 crores. Net Interest Margin (NIM) stood at 5.22% in Q2FY24, down 35 bps QoQ but up 7 bps YoY. The asset quality improved, with Gross Non-Performing Assets (NPA) at 1.72% and Net NPA at 0.37%, both showing a decline in QoQ and YoY. The Capital Adequacy Ratio was healthy at 21.7% in Q2FY24. On the deposit front, there was a marginal decline in gross deposits to Rs. 3,85,950 crores in Q2FY24, while gross advances grew by 8.7% QoQ, primarily driven by the credit card and retail microfinance segments. However, the Current and Savings Account (CASA) ratio decreased to 48.30% in Q2FY24.

The bank also received approval from the Reserve Bank of India to acquire Sonata Finance Private Limited, a Micro Finance Institution, for approximately Rs. 537 crores, making it a wholly-owned subsidiary once the transaction is complete. Overall, the bank’s financial results showed resilience, with NII growth and improved asset quality being notable highlights, despite challenges in certain areas like provisions and declining CASA. The bank continues to focus on strengthening its position in the market and expanding its offerings.

Key Concall Highlights

• The bank’s management thinks the credit cycle still looks acceptable. However, continuing inflation and elevated interest rates will ultimately create uncomfortable outcomes.
• The bank’s subsidiary, Kotak Securities, continues to be a significant contributor with Rs. 324 crores of post-tax profit, a growth of 45% over a year ago. Kotak securities market share again grew from 5% in Q2FY23 to 8.8% in Q2FY24.
• KMB’s microcredit business continues its growth momentum and healthy growth in disbursement. There is room for opportunities as the bank sees healthy credit demands in the rural economy in this business.
• For FY24, KMB continues to guide NIM of 5% as the impact of deposit repricing is likely to be lower in the second half, which has seasonally higher demand.
• Sonata’s acquisition brings a high-yielding book into the bank’s portfolio. However, its impact on margins is unlikely to be material as its share in the bank’s overall AUM is low.

Valuation and Outlook

Kotak Mahindra Bank, a leading private lender based in Mumbai, reported decent Q2FY24 results, with net profit slightly exceeding market expectations and showing double-digit growth compared to the previous year. The bank has a history of maintaining strong asset quality, and this was evident in the reduction of non-performing assets (NPAs) and proactive provisioning. As anticipated, there was a compression in Net Interest Margin (NIM), and we expect this trend to continue in the upcoming quarters. 

Kotak Mahindra Bank’s strategic focus on microfinancing, which grew by nearly 80% year-on-year, is expected to contribute significantly to its profits and help mitigate the impact of NIM compression. This is exemplified by its recent acquisition of Sonata Finance.

Additionally, with the Reserve Bank of India (RBI) approving the appointment of Ashok Vaswani as the MD & CEO of KMB from January 1, 2024, for a three-year term, superseding internal candidates, we anticipate potential changes in the bank’s strategies. The bank’s future outlook will depend on its performance under this leadership, which will provide more clarity.