Detailed narrative
Kotak Mahindra Bank navigated a "muted" Q1 FY25, marked by the RBI embargo on its 811 and credit card businesses, which impacted unsecured retail growth and contributed to a 20 basis point reduction in Net Interest Margin (NIM) to 5.02% from 5.22% in December. Despite these headwinds, the bank demonstrated resilience, with consolidated profit (excluding the KGI transaction) growing ~7% YoY to ₹4,435 crore, and standalone bank PAT increasing 2% YoY to ₹3,520 crore. Customer assets saw robust growth, with consolidated assets up ~22% YoY to ₹4,94,105 crore and bank customer assets up 20% YoY to ₹4,35,827 crore. Average total deposits also grew significantly by 21% YoY and 7% QoQ, primarily driven by a 38% YoY increase in term deposits, though low-cost CASA deposits remained a challenge.
A significant event during the quarter was the divestment of a 70% stake in Kotak General Insurance (KGI) to Zurich Insurance, completed on June 18, 2024. This transaction generated a post-tax profit of ₹2,730 crore for the standalone bank and a total profit impact of ₹3,013 crore at the consolidated level, recognized as an exceptional item📎. Additionally, the implementation of new RBI directions on investment portfolio valuation resulted in a post-tax gain of ₹3,414 crore accounted in reserves. The bank's capital adequacy remains strong at 22.8% at the group level, with a CET-1 of 21.9%, and a book value per share of ₹710.
Management provided a detailed update on the RBI embargo, stating "substantial progress" has been made on all points, with a comprehensive plan in consultation with the RBI. External auditors, GT Bharat, have commenced their work, and the bank is "on track, maybe even slightly ahead" of its financial estimates regarding the order. While the embargo affected digital onboarding for 811 and credit cards, the bank maintained ENR levels and even saw a slight increase in credit card spend market share. The bank's subsidiaries delivered strong performances, with Kotak Securities' profit surging 83% YoY to ₹400 crore and Kotak AMC's profit up 65% YoY to ₹175 crore, driven by increased market volumes and equity AUM growth of 61% to ₹2,68,567 crore.
Looking ahead, the bank is focused on "transforming for scale" across its consumer, commercial, and corporate segments. Strategic initiatives include enhancing the deposit franchise through programs like ActivMoney (relaunched with a new campaign) and a micro-market strategy for top cities. The bank aims for mid-teen growth in its unsecured retail book once the RBI embargo is lifted. It also plans to expand its physical branch network to 3000-3500 branches over the next 4-5 years, increasing from the current ~150-250 annual additions. While IT spending is expected to remain elevated for the next one to two years due to reinforced investments, management anticipates making a "dent" in the cost-to-income ratio over the next 4-5 years.
Key concerns highlighted included ongoing stress in low-cost deposits (an industry-wide phenomenon) and specific pockets of stress in lower-ticket unsecured retail loans and overleveraged credit card customers. The bank has tightened credit policy norms and established specialized collections teams to manage these risks. Credit cost for the bank increased to 55 bps annualized, primarily due to these unsecured retail losses. Despite these challenges, the bank maintains a Provision Coverage Ratio (PCR) of 75% and a Net NPA of 0.35%, which management deems comfortable. The microfinance business, impacted by heatwaves, elections, and monsoon effects, is expected to improve in the second half of the year. The management expressed confidence in its strategy and ability to deliver shareholder value, leveraging its "fortress balance sheet" and generating good returns on its excess capital through alternative asset investments and financial market infrastructures.