Shares of Kotak Mahindra Bank fell by 7.2% to Rs 1,735 on October 21 after the financial results of the company for the second quarter failed to meet the market expectations. The decline highlights investor concerns regarding the bank’s performance in a challenging economic environment.

Disappointing Financial Performance

In its Q2 FY25 report, Kotak Mahindra Bank reported a 4% Y-O-Y increase in net profit to Rs 3,344 crore. This was falling short of the anticipated net profit of Rs 3,494 crore. While net interest income increased by 11% year-on-year to Rs 7,020 crore, the bank’s net interest margin (NIM) contracted to 4.91%, down from 5.22% in the previous year.
The primary disappointment was in the asset quality. Net NPAs increased to 0.43% from 0.37%, while gross non-performing assets (NPAs) decreased to 1.49% at the end of September 2024, down from 1.72% a year earlier.

Concerns Over Asset Quality

According to reports, analysts have expressed worries about the bank’s asset quality. Both slippages and credit costs were higher than expected. Jefferies issued a ‘hold’ rating, setting a target price of Rs 2,080 per share, emphasising that clarity on the RBI’s restrictions is crucial for the bank’s future trajectory.

Goldman Sachs’s Cautious Outlook

Goldman Sachs echoed the cautious sentiment, maintaining a ‘buy’ rating with a target price of Rs 2,286 per share. They pointed to healthy loan growth and pre-provision operating profit as positive signs, despite the recent setbacks.

JP Morgan Highlights Asset Quality Strain

JP Morgan analysts have identified a strain on asset quality at Kotak Mahindra Bank, attributing it to a 1.2% rise in net slippages. This increase is primarily linked to challenges in the credit card and microfinance segments.
The analysts also noted that the bank’s CASA growth remained muted at 4% year-on-year. In contrast, total deposit growth and loan growth were reported at a robust 15% year-on-year.
Despite these concerns, JPMorgan has maintained an ‘overweight’ rating on the stock, setting a target price of Rs 2,030 per share.

RBI Restrictions

The Reserve Bank of India’s earlier decision to prohibit Kotak Mahindra Bank from onboarding new customers through online and mobile banking channels, as well as from issuing fresh credit cards, has intensified scrutiny of the bank’s operations. This embargo was imposed due to identified deficiencies in the bank’s IT inventory management.
As stakeholders closely monitor the situation, the outlook for Kotak Mahindra Bank remains uncertain amid ongoing challenges in its operational landscape. Investors are keen to see how the bank navigates these issues moving forward.