Kotak’s asset quality gains drive robust Q4 show: Dnyanada Vaidya

Kotak Mahindra Bank delivered a strong set of Q4 results, with multiple positives across key metrics. Margins expanded unexpectedly, credit costs declined, and most operating line items showed a positive bias. As ET Now noted, the numbers were “extremely strong,” with “margin increase” and “credit costs” both surprising on the upside. The bigger question now is whether this level of performance can be sustained and whether valuations still offer comfort.

According to analyst Dnyanada Vaidya from Axis Securities, the standout elements of the quarter were margin expansion and improving asset quality. She noted that while net interest income was broadly in line, the “13 basis points increase in margins” came as a positive surprise.

More importantly, stress in unsecured segments such as microfinance, personal loans, and credit cards has started to ease, while the secured book remains stable. This has led to lower fresh stress formation and a favourable outlook on credit costs, expected to remain around “70 basis points plus or minus five.”

However, the management’s commentary on margins going ahead has introduced some caution. ET Now highlighted that net interest margins could remain “flattish or even slightly below,” largely due to higher term deposit rates. Vaidya acknowledged this as a “slight negative surprise,” adding that rising deposit costs will weigh on margins. That said, she believes the impact could be partly offset by growth in unsecured lending and a continued push towards CASA deposits. She also pointed out that deposit competition remains intense across the banking system, as credit growth continues to outpace deposit growth.

On the corporate lending side, Kotak has seen relatively slower growth compared to peers. ET Now observed that the corporate book is expanding at a “very slower rate,” reflecting the bank’s conservative stance. Vaidya explained that the bank has prioritised “profitable growth” and avoided segments where the risk-reward equation was not favourable. This approach has supported margins so far. Going forward, she expects some pickup, with corporate, SME, and secured lending likely to drive growth, while expansion in unsecured lending will remain measured.

Another factor that had been weighing on sentiment was the potential acquisition of IDBI Bank. ET Now pointed to Kotak’s openness to inorganic growth “at the right price.” Vaidya clarified that the bank remains cautious and that the IDBI deal is “not on the cards right now.” This, she said, removes an overhang and is positive for valuations. She added that Kotak continues to deliver a strong return profile, with “2 plus percent ROA,” second only to ICICI Bank among large peers.

The key debate now revolves around the sustainability of returns. ET Now questioned whether a “2% plus ROA” can be maintained, especially with softer margins and previously low credit costs. Vaidya believes it is achievable, supported by three factors. First, operating leverage should improve, helping reduce the cost-to-asset ratio. Second, fee income—particularly from cards—has been weak but is expected to recover as the bank pushes growth in that segment. Third, credit costs, which were elevated earlier, have stabilised and should remain steady.

She concluded that while margins may soften, these levers should help offset the pressure, allowing Kotak to sustain a return on assets in the range of “2% to 2.1%” over the next couple of years.

Kotak Mahindra Bank’s Q4 performance reflects strong execution, especially on margins and asset quality. While headwinds from deposit costs and competitive intensity persist, stable credit trends and operating improvements could help the bank maintain healthy profitability levels.