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Synopsis : Kotak Mahindra Bank's Q2 FY25 results led to a significant drop in its stock price, reflecting investor concerns over mixed performance metrics. Despite a year-over-year growth in customer assets and a moderate increase in PAT, challenges such as declining net interest margin (NIM) and rising slippages in unsecured loans contributed to a downward market response. Nuvama Institutional Equities maintained a 'Reduce' rating, setting a revised target price of Rs 1,615, highlighting potential risks associated with asset quality and operational expenses.
Kotak Mahindra Bank Shares Drop After Mixed Q2 Results
Shares of Kotak Mahindra Bank Ltd experienced a sharp decline, falling 7.21% to a low of Rs 1,735 on Monday following the announcement of mixed financial results for Q2 FY25. The results revealed a complex picture: while there was a year-over-year (YoY) increase in customer assets by 18% and a 5% YoY rise in profit after tax (PAT), certain key performance indicators raised concerns among investors.
Key Performance Highlights
Net Interest Margin (NIM): Kotak's NIM fell by 11 basis points (bps) on a quarter-over-quarter (QoQ) basis, attributed to a lower proportion of unsecured loans following regulatory restrictions. Additionally, credit costs surged by 16% QoQ, surpassing market expectations, and slippages rose by 38% QoQ, primarily driven by older credit card accounts. The bank's asset quality deteriorated, with gross non-performing assets (GNPA) rising by 10% QoQ.
Brokerage Outlook: Nuvama Institutional Equities maintained a 'Reduce' rating on Kotak shares, setting a target price of Rs 1,615 per share. The brokerage firm cited risks of further NIM compression and rising operational expenses in the latter half of FY25 as key concerns. They projected stability in credit costs but noted the need for close monitoring of microeconomic indicators, which could influence asset quality trends.
Operational and Strategic Developments: The bank's management has indicated a strategic shift aimed at improving NIM through the acquisition of a Rs 4,100 crore personal loan portfolio and a minor reduction in the cost of deposits. The management remains optimistic about asset quality improvement in secured and rural loans by H2 FY25 and continues to target becoming the third-largest private bank in India over the next five years. Additionally, Kotak is seen as a potential bidder for IDBI Bank, reflecting its expansion ambitions.
Concerns Highlighted by Nuvama
Nuvama's assessment pointed to significant challenges, particularly in Kotak's credit card and microfinance segments, which saw increased slippages and higher provisioning costs. The brokerage firm noted that Kotak's core Pre-Provision Operating Profit (PPOP) dipped by 3% QoQ, while the microfinance segment's PAT fell sharply, by 30% QoQ and 85% YoY. The rise in credit costs was attributed to issues in the unsecured loan portfolio, although recent loan approvals appeared to be performing better.
In terms of strategic guidance, Kotak’s management has projected a stable outlook for credit costs over the next few quarters, with an expected decline thereafter. However, Nuvama emphasized the need for cautious optimism, as external factors could impact the bank's efforts to stabilize costs and improve margins. The Reserve Bank of India's earlier restriction on Kotak’s onboarding of new customers for digital services continues to impact the bank's operations, although management assures that compliance measures are progressing as planned.
Conclusion
Kotak Mahindra Bank's mixed Q2 FY25 results have led to a cautious market outlook, underscored by Nuvama Institutional Equities' 'Reduce' rating. The bank's focus on improving its loan mix and controlling slippages in unsecured segments will be critical in the coming quarters. While Kotak’s strategic initiatives indicate a long-term growth trajectory, near-term pressures on asset quality and margin performance remain key areas of concern for investors.
Disclaimer: The information provided in this article is for informational purposes only and should not be considered financial advice. Please consult a financial expert before making any investment decisions.
