Kotak Mahindra Bank shares fall after Q3 results; IIFL flags valuation concerns
Kotak Mahindra Bank shares fell over 4% on January 27 following Q3 results that broadly met expectations but were impacted by ₹96 crore in higher employee costs under the new Labour Code. While NII grew 5% YoY and PAT increased 7% YoY, PPOP growth moderated to 8% YoY below consensus. The bank showed strong asset quality improvements with credit costs declining 16bp QoQ to 0.63% and slippage ratio improving to 1.34%. Brokerages maintained mixed ratings with price targets ranging from ₹460 to ₹530, citing stable performance but valuation concerns.
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Kotak bank shares declined over 4% on Tuesday, January 27, following the release of its December quarter results, despite the financial performance broadly meeting market expectations. The stock's decline was primarily attributed to higher employee costs under the new Labour Code implementation, which impacted the bank's profitability metrics.
Financial Performance Overview
The bank's quarterly results showed mixed signals, with some metrics meeting expectations while others fell short of consensus estimates.
| Metric | Performance | Details |
|---|---|---|
| Net Interest Income (NII) | 5% YoY growth | In line with estimates |
| Labour Code Impact | ₹96 crore | Moderated PPOP growth |
| Pre-Provision Operating Profit (PPOP) | 8% YoY growth | Below consensus expectations |
| Profit After Tax (PAT) | 7% YoY growth | Supported by lower provisions |
| Net Interest Margins (NIMs) | 4.54% | Remained flat QoQ |
Asset Quality Improvements
The bank demonstrated notable improvements in asset quality metrics during the quarter, outperforming market expectations in several key areas.
| Parameter | Current Quarter | Previous Quarter | Change |
|---|---|---|---|
| Credit Cost | 0.63% | 0.79% | -16 basis points QoQ |
| Slippage Ratio | 1.34% | 1.41% | Improvement QoQ |
| Recovery Performance | Higher | - | Aided credit cost decline |
The credit cost decline of 16 basis points quarter-on-quarter significantly outperformed expectations of a 7-8 basis point decline, primarily aided by higher recoveries during the period.
Management Commentary and Outlook
Management provided insights into various business segments and future expectations during the results discussion. They indicated that microfinance and personal loan credit costs have started to decline, though stress continues in the retail commercial vehicle segment. The management expects gradual improvement in overall credit costs through Q4FY26-Q1FY27.
Regarding net interest margins, management attributed the muted performance to short-term liquidity management, which had a 4 basis point impact. For Q4FY26, they expect moderate NIM improvement, supported by benefits from the CRR cut.
On mergers and acquisitions, the bank maintained that any deal must be financially and strategically suitable with smooth integration capabilities.
Brokerage Recommendations
Analyst opinions varied, with price targets ranging across different investment houses:
| Brokerage | Rating | Price Target | Key Comments |
|---|---|---|---|
| IIFL | Add | ₹485 | Valuations remain unattractive relative to profitability |
| Nomura | Neutral | ₹460 | Strong growth and easing credit costs drove 2-3% EPS upgrade |
| Jefferies | Buy | ₹530 | Standalone Q3 profit rose 6% YoY, ahead of estimates |
| Bernstein | Market weight | ₹490 | Stable Q3 operating performance with stable asset quality |
Jefferies highlighted that excluding one-off costs, standalone Q3 profit rose 6% year-on-year, ahead of estimates. The brokerage noted loan growth of 16% and deposit growth of 15% outpaced peers such as HDFC and ICICI, although NII growth of 5% lagged behind.
Growth Metrics and Peer Comparison
Despite the stock decline, Kotak Mahindra Bank demonstrated competitive growth metrics compared to industry peers. The bank achieved loan growth of 16% and deposit growth of 15%, outpacing major competitors. However, the NII growth of 5% remained below peer performance levels.
Bernstein noted that NIMs held steady at 4.54%, suggesting a potential end to the margin normalisation phase. Despite ongoing weakness in microfinance and credit card segments, loan growth remained ahead of peers, and return on assets stayed at 1.90%.
Management indicated that potential deals like IDBI are evaluated carefully but are not a current priority, suggesting lower deal probability in the near term.
Historical Stock Returns for Kotak Bank
| 1 Day | 5 Days | 1 Month | 6 Months | 1 Year | 5 Years |
|---|---|---|---|---|---|
| -3.64% | -2.58% | -5.81% | -6.15% | +7.50% | +13.52% |
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