Kotak Mahindra Bank's margins to improve after ban removal: Brokerages

Kotak Mahindra Bank’s net interest margin is likely to swell after the Reserve Bank of India (RBI) lifted its restrictions on the private lender that barred it from issuing fresh credit cards and onboarding new customers through digital mode, brokerages said on Thursday.

 

The bank’s net interest margin (NIM) has seen a decline of over 35 basis points (bps) since the restrictions were imposed by the regulator in April 2024. On Wednesday, after nearly ten months, the RBI lifted curbs on the bank after being satisfied with the lender’s remedial actions.

 

According to Suresh Ganapathy and Punit Bahlani from Macquarie Capital, with unsecured stress plateauing for most large private sector banks and focus shifting to resuming growth, the withdrawal of the ban should help Kotak Mahindra Bank improve growth in this segment.

 

“Higher yields from this segment should also provide a cushion to margins and accordingly aid improvement in return on assets (RoAs),” they said in their report. Following the positive development, the bank’s shares jumped 1.46 per cent on Thursday to close at ₹1,971. 60.

 

Kotak Mahindra Bank said it will continue to work closely with the RBI to soon resume digital onboarding of new customers and issue fresh credit cards.

 

After the restrictions, Kotak Mahindra Bank’s credit card outstanding dropped by 978,860 cards to 5.02 million as of December 2024. In April, the bank’s outstanding credit card stood at a little over 6 million. Its market share in outstanding credit cards also dropped to 4.6 per cent from 5.8 per cent. 

 

The bank's NIM faced substantial pressure which declined from 5.28 per cent in Q 4FY24 to 4.93 per cent in Q3FY25.

 

“We observe that HDFC Bank too has gone through a similar suspension cycle, but has not been able to recoup its lost credit cards in force market share (25-26 per cent), which currently stands at 21.4 per cent. With asset quality noise still at elevated levels in the credit card business across the industry, we believe Kotak Mahindra Bank may also adopt a relatively calibrated growth approach in the near-to-medium term; hence benefits too shall gradually flow through the profit and loss,” said analysts at Emkay.

 

Motilal Oswal Financial Services noted that despite the ban, the bank over the past year, reported a rather resilient performance, with steady growth and profitability, backed by robust margins. During 3QFY25, its loan book grew 15.1 per cent year-on-year (Y-o-Y), and 3.6 per cent sequentially, led by healthy traction in business banking, CV/CE, and home loans.

 

“With the RBI lifting significant regulatory restrictions, we expect business growth and underlying profitability to pick up, with stronger traction in the consumer banking business. This will also support lending yields and margins, which have already compressed to 4.93 per cent from the peak of 5.75 per cent seen during Q4FY23,” analysts at Motilal Oswal said in a report.

 

The analysts also noted that the RBI’s decision to revoke the ban underscores its comfort in the remedial steps taken by the bank to plug the various gaps. It also ratifies the bank’s resilience, as well as the efficacy and strategic foresight of the new management team to deftly handle such a critical situation, which posed grave concerns about the bank, right after several changes in the top leadership team.

 

The restrictions were placed on the bank just a few months after Ashok Vaswani was appointed as the new MD & CEO of the bank in January 2024.

 

(Disclaimer: Entities controlled by the Kotak family have a significant holding in Business Standard Pvt Ltd)