Kotak Mahindra Bank remains constructive on its medium-term growth strategy despite near-term sectoral challenges, according to brokerage firm DAM Capital following a meeting with the bank’s Managing Director and CEO Ashok Vaswani.
The brokerage said it continues to retain its “Buy” rating on the private sector lender and sees an upside potential of around 18% from current levels. DAM Capital noted that while near-term pressures remain, the bank’s long-term strategy appears well-defined and execution-focused.
According to the brokerage note, Kotak Mahindra Bank expects industry-wide net interest margins (NIMs) to remain under pressure as funding costs continue to inch higher. The bank has already increased rates on higher-tenure deposits to improve book duration and is also reviewing its own balance sheet positioning.
Management also addressed concerns around the ongoing West Asia crisis, stating that the bank has not yet seen any material stress emerging from the situation. Large corporate balance sheets remain healthy, while mid-corporate and SME segments could face some pressure if geopolitical tensions intensify. However, management indicated that it has not observed any significant rise in bounce rates, drawdowns or delinquencies so far.
The brokerage highlighted that Kotak aims to maintain a return on assets (RoA) of around 2% over the medium term, even as unsecured lending gradually rises. Credit costs, which stood at a healthy 39 basis points in Q4, are expected to normalise as the unsecured loan mix increases.
One of the key investor concerns discussed during the interaction was Kotak’s excess capital position and relatively lower return ratios compared with peers. DAM Capital noted that management acknowledged investor concerns around return on equity (RoE), which currently trails some competitors due to excess capital at subsidiaries. While higher dividend payouts remain an option, management suggested that inorganic opportunities could also help utilise excess capital, although timelines remain uncertain.
The brokerage also discussed concerns around slower loan growth compared with peers. Management said the bank has shifted from a cyclical “start-stop” growth approach to a more sustainable and predictable growth strategy aligned with nominal GDP expansion.
Technology and artificial intelligence continue to remain central to the bank’s transformation strategy. Kotak said it continues to allocate around 11–13% of operating expenditure towards technology investments and is increasingly focusing on AI-led operating models, automation and digitisation initiatives.
The bank also highlighted improvements in its unsecured lending framework. Management stated that Kotak has moved away from the joint liability group (JLG) approach towards individual-based underwriting assessments while continuing to target unsecured loans as 11–11.5% of the portfolio mix without compromising secured lending growth.
DAM Capital noted that Kotak’s “One Kotak” strategy — aimed at shifting from a product-oriented approach to a customer-centric approach — has been progressing well. The strategy focuses on four key customer cohorts: affluent and HNI customers, the 811 digital franchise, SME and mid-corporate banking, and corporate and institutional clients.
The brokerage added that operational efficiency metrics have also improved through branch optimisation, ATM rationalisation and personnel cost control measures.
DAM Capital said it remains constructive on the stock and believes that if geopolitical concerns in West Asia do not worsen materially, earnings growth could improve further going ahead.
Disclaimer: This article is based on brokerage commentary. Views expressed are those of the brokerage and do not constitute investment advice or recommendations by the publication.