Kotak Bank has recently hogged headlines, but not for good reasons. The stock corrected by as much as 6% in a single day, following its Q4 earnings. Its bottom line in the latest reported quarter shrank by 14% over the same period last year.
To be sure, the bank had been a laggard in the industry for several years. Investor sentiment in the stock was bogged down by the overhang of regulatory bans and a change in leadership. Over the last 5 years, Kotak Bank has delivered 70% return, more than halfway behind the 154% return delivered by Nifty Private Bank Index. Similarly, the bank has delivered only 17% (unannualized) return over the last 3 years, against the sector’s 51% return.
It is only in the last one year that the bank had started to catch up. But the latest quarter’s earnings have rained on this newfound investor confidence. Was the reaction justified? Or was it an overreaction that is set to reverse over the next few days? Let’s explore.
Digging into the 6% price-drop
Kotak Bank’s Q4 earnings were moving along on rather expected lines. They saw 5% year-on-year growth in net interest income, 7% rise in other income, and operating expenses saw faster growth at 13%. But things took a turn for the worse when it came to provisioning. Provisions and contingencies grew at a whopping 245% from Rs.264 crore in Q4 FY24 to Rs.909 crore in Q4 FY25.
The additional Rs.645 crore that has been set aside towards anticipated stress on the books, was the primary driver of the drop in profits from Rs.4,133 crore to Rs.3,552 crore, and the steep fall in stock-price on Monday.
Of course, operating expenses spiked up too. Another factor contributing to the year-on-year hit on the bottom line is larger non-core incomes earned in the base quarter. Q4 FY24 had seen provision reversal of Rs.157 crore, higher interest on income-tax refunds (Rs.142 crore vs Rs.24 crore in Q4 FY25) and higher tax credits (Rs.200 crore vs Rs.110 crore in Q4 FY25).
But the point to note is that excluding provisions, the bank’s profits were flat year-on-year.
The stress is an industry-wide phenomenon
After the pandemic, central banks around the world had eased their monetary policy strings to spur the economy along. The resulting liquidity surplus made it into the borrowers’ hands. So far so good.
But the twist in the tale came from the fact that private capex remained on the fence and corporate credit-growth remained sluggish. In effect, credit-growth was driven by lending to retail borrowers and microfinance. These segments saw almost unprecedented competition, and lenders started vying for borrowers with lower and lower creditworthiness. The industry excesses even drew the regulator’s wrath, and risk-weights were hiked on risky borrower segments.
And now, the chickens have come home to roost. The unsecured retail lending and microfinance segments are seeing rising stress across the entire lending industry.
Early signs indicate that the stress may have bottomed out
The entire lending ecosystem has pivoted towards course-correction in the last couple of quarters. The focus has shifted towards creditworthy growth and on improving collection efficiencies. This is evident from the fact that while the portfolio-at-risk in the 31-180-day bucket worsened from 4.3% to 6.4% sequentially in the quarter ending December 2024, that in the 1-30-day loan bucket has improved quarter-on-quarter from 2.1% to 1.8%.
Speaking specifically of Kotak Bank, in Q4 FY25, it witnessed a robust 14% growth in net advances, led by 31% growth in SME loans and 17% growth in consumer loans. But by actively defocusing on the stressed retail microcredit segment, along with higher provisioning, the microfinance segment saw 33% degrowth. As of March 2025, retail microcredit has shrunk to 10.5% of the bank’s advances, markedly down from 11.8% as of March 2024.
Furthermore, driven by higher provisioning that has taken its provision coverage ratio up from 76% to 78%, notwithstanding a pickup in slippages and gross NPA, net NPA has fallen from 0.34% to 0.31% of advances year-on-year.
Finally, stress has continued its sequential downtrend in the quarter ending March 2025. SMA-2 accounts were at Rs.116 crore as of March 2025, significantly lower than the Rs. 208 crore as on December 2024. Fresh slippages in Q4 FY25 were at Rs.1,488 crore, lower than Rs.1,657 crore recorded in the previous quarter. Gross NPA has fallen from 1.5% to 1.42% quarter-on-quarter, net NPA has seen a sharper reduction from 0.41% to 0.31%, and credit-cost has moderated from 0.68% to 0.64% during the quarter.
Bright spot among banks
Gross advances for Kotak Bank grew at 14% year-on-year in the latest reported quarter, continuing the robust trend of 15% CAGR seen over the last five years. More importantly, the bank has had a long-held culture of conservative lending, established by its founder Mr. Uday Kotak. As a result, the bank has held its ground despite industry-wide stress.
One of the primary stress factors among banks in current times, is rising stress on account of unsecured retail lending and microfinance. Yet another distressing factor is shrinking net interest margins (NIMs) as monetary easing leads to lower lending rates while deposit rates remain relatively sticky. Finally, as financialization of assets takes away from bank deposits, credit-deposit ratios have been spiking in the industry. This forces the need to supplement funds with high-cost borrowings, thereby impacting margins, while asset-liability matching and capital adequacy could also be at risk.
On all of these metrics, Kotak Bank remains a bright spot among its peers. Its net NPA at 0.31% is the lowest among large-cap private banks. Even when it comes to growth and profitability, Kotak has been leading the pack. Its deposits have grown at 14% CAGR over the last 5 years, surpassing the industry growth-rate of 13% during the period. As a result, its credit-deposit ratio of 86% is at the lower end in the industry, leaving the bank ample room for profitable credit-growth. Its NIM at 4.97% is also the highest among large-cap private banks.
Kotak’s prospects look bright as well. RBI had placed a ban on Kotak, preventing it from issuing credit-cards and onboarding customers digitally. But the 10-month long embargo was lifted in February this year, and the bank plans to push the pedal on growth now. Its unsecured retail loan portfolio is on track to expand to 15% of its net advances.
This, along with the cross-selling opportunities in the high-end personal loan portfolio acquired from Standard Chartered, is expected to improve overall yields at the bank. Of course, stress will need to be monitored.
Risks remain
The latest quarter saw 15% growth in deposits. But this was primarily led by 25% growth in term deposits, even as growth in low-cost CASA remained sluggish. Current accounts saw a muted 9% growth, while saving accounts declined by 1%. Result? CASA ratio has steadily dropped from more than 60% in FY21 to 43% in FY25. Despite cutting the rates on saving accounts, the bank’s cost of funds has increased from 4.98% to 5.09% year-on-year.
Meanwhile, with a slightly slower growth in advances at 14% year-on-year, the bank’s credit-deposit ratio has accelerated from 83.8% to 85.5%. While it is still within the comfort zone, sustained sluggishness in low-cost deposit-growth can affect the bank’s margins. NIM has already declined from 5.28% to 4.97%, and slow CASA growth can add to the pressure on margins. This could be exacerbated with a further rise in credit-costs. Credit-costs have accelerated from 0.4% in FY24 to 0.6% in FY25.
Moreover, as policy rates trend lower, assets will reprice faster than liabilities, leading to short-term pressures on margins. While the fresh focus on high-yield credit-cards can negate some of the margin-stress, one can rule out margin-expansion until demand for credit picks up substantially.
That said, thanks to years of underperformance, Kotak Bank is now trading at 2.36 times its book value – a significant discount to the private banking sector’s valuation of 2.6x, thereby offering an attractive entry point into the bluechip banking stock. This is particularly true in the current circumstances, considering that the stress is at the cusp of bottoming out. Experts have pegged the bank’s target price at Rs.2,500 apiece, reflecting more than 20% upside from current levels.
Disclaimer:
Note: We have relied on data from www.Screener.in throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.
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Ananya Roy is the founder of Credibull Capital, a SEBI-registered investment adviser. An alumnus of NIT, IIM, and a CFA charter-holder, she pens her views on the economy and stock markets.
Disclosure: The writer and his dependents do hold the stocks discussed in this article.
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