Shares of Kotak Mahindra Bank Ltd recorded a sharp drop in Monday's trade after the private lender posted mixed second quarter (Q2 FY25) earnings. The stock plunged 7.21 per cent to hit a day low of Rs 1,735.
Nuvama Institutional Equities maintained its 'Reduce' rating with a downward target price of Rs 1,615 on Kotak due to "upside risks". "KMB posted mixed Q2 earnings with strong 18 per cent growth in customer assets, lower opex, but NIM (net interest margin) fell and asset quality deteriorated sharply. NIM fell 11bp QoQ due to lower share of unsecured following (RBI) ban. Slippage rose sharply by 38 per cent QoQ while credit cost rose 16 per cent QoQ, 11 per cent higher than consensus. Core PPOP fell 3 per cent QoQ. PAT grew 5 per cent YoY. PAT of MFI segment fell 30 per cent QoQ/85 per cent YoY," the domestic brokerage stated. Earlier in April this year, the Reserve Bank banned Kotak bank from onboarding new customers on its online and mobile banking channels.
"We are cutting EPS by 9 per cent for FY25E/26E and revising target price to Rs 1,615/2x core BV FY26E. Credit card and MFI slippage shall likely turn around earliest in three quarters. Management guides to stable credit cost in H2FY25, but we see upside risks. We also reckon an uptick in other opex in H2FY25," Nuvama also said.
It mentioned that Kotak saw a sharp deterioration in asset quality led by credit cards. "Slippage rose 38 per cent QoQ. Total 35 per cent of slippage was from credit cards of old vintage while the recent sanctions are performing well. There is overleveraging in rural segments. GNPA grew 10 per cent QoQ. Specific credit cost rose 16 per cent QoQ to Rs 670 crore much higher than the consensus estimate of Rs 600 crore. The bank experienced a reversal of Rs 9 crore on AIF provisions. PCR stood at 71 per cent from 75 per cent QoQ," Nuvama said.
The brokerage said Kotak's Management expects NIM to recover after the proposed buyout of a PL portfolio of Rs 4,100 crore and a small 4bps reduction in CoD driven by the recent cut on smaller ticket savings.
"We believe the loan mix shall be a key determinant of NIM more than anything else. Management also expects net slippage to improve with recoveries in secured and rural loans in H2FY25. We reckon industry stress in cards and MFI shall improve earliest in FY26E. The CEO aims to make KMB the third-largest private bank in five years. Media reports suggest that KMB is a potential bidder for IDBI Bank," Nuvama noted.
In terms of guidance, the brokerage said, "Credit cost (annualised) during the quarter increased to 65bp driven by higher slippages in the unsecured book. The management-guided, credit cost shall remain largely stable over the next two to three quarters and eventually come down. However, it shall depend on how micro indicators play out."
Nuvama further underscored that Kotak has made substantial progress on all points guided by the RBI and is on track with the expected timeline.