Kotak Bank Shares Fall 7% on NIM Compression, Asset Quality Concerns

On Monday, the Kotak Mahindra Bank shares fell 6.9 percent, touching a day’s low price of Rs 1,977 on NSE after it posted a challenging first quarter of FY26, reporting a 7% year-on-year decline in standalone net profit to Rs 3,282 crore for Q1FY25, down from Rs 3,520 crore in the corresponding period last year. The Q1FY25 result reflects the absence of last year’s one-time gain from the strategic sale of a stake in Kotak General Insurance and the impact of increased provisioning. On a consolidated basis, net profit also slipped, reflecting intense margin pressure and the adjustment of loan portfolios, but excluding extraordinary items, the core profit grew modestly.

Net interest income (NII), a key measure of the bank’s core earnings from lending, rose 6 percent YoY to Rs 7,259 crore, supported by a healthy 14 percent expansion in net advances, which reached Rs 4,44,823 crore as of June 30, 2025. Despite this, the net interest margin (NIM) contracted 37 basis points to 4.65 percent.

A significant factor behind the profit drop was higher provisions and contingencies, which surged 109 percent YoY to Rs 1,208 crore in Q1FY25. This was predominantly due to rises in non-performing loans in the unsecured retail segment and select microcredit geographies. Asset quality saw a marginal deterioration, with the gross non-performing asset (GNPA) ratio rising to 1.48 percent, up from 1.39 percent a year ago, while net NPA remained stable at 0.34 percent. The bank’s provision coverage ratio (PCR) stood robust at 77 percent, indicating conservative risk management. However, slippages were notably increasing by 21.77 percent year on year.

Deposit growth remained healthy. Average total deposits rose 13 percent to Rs 4,91,998 crore and the Current Account Savings Account (CASA) ratio, while still high at 40.9 percent, declined from 43.4 percent last year, reflecting increased competition for retail deposits. Capital adequacy remained a strong point; the bank’s Capital Adequacy Ratio (CAR) stood at 23 percent, providing a considerable buffer over regulatory requirements, and the Common Equity Tier 1 ratio was 21.8 percent.

Operationally, the cost-to-income ratio remained elevated at 46.19 percent, a factor the management attributed to ongoing investments in distribution, technology, and risk controls. Standalone Return on Assets (ROA) tapered to 1.94 percent, and Return on Equity (ROE) moderated to 10.94 percent from 13.91 percent a year ago, reflecting margin compression and increased loan loss provisions.

Ashok Vaswani, Managing Director and CEO, expressed confidence in Kotak Mahindra Bank’s long-term trajectory despite near-term headwinds. The management acknowledged macroeconomic challenges, including loan book stress in specific retail segments like commercial vehicles, and they expect the microfinance book to stabilise and expect it to improve in the future. They plan to manage risks despite headwinds.

Brokerage companies like Nomura have initiated a ‘Neutral’ rating with a target price of Rs 2,150 and have cut their FY26-28 EPS estimate by 3 to 7 percent, citing margin pressure and asset quality concerns. Morgan Stanley maintained its ‘Overweight’ rating stance with a target price of Rs 2,600 on the back of NIM decline and an increase in NPAs. They expect a margin compression, but earnings improvement is expected.