Axis Securities has reiterated its BUY call on Kotak Mahindra Bank Limited, assigning a target price of Rs 515, implying an upside of 22% from current levels. The bank’s Q3FY26 performance reflects stabilising asset quality, particularly in unsecured portfolios, alongside moderating credit costs. While near-term margins remained flat due to liquidity deployment, structural tailwinds from unsecured loan mix improvement, deposit repricing, and operating leverage remain intact. Management commentary points to a gradual recovery in NIMs and RoA expansion over FY27–28, reinforcing confidence in Kotak’s medium-term earnings trajectory and balance-sheet resilience.

Q3FY26 Snapshot: Earnings Largely In Line, Margins Pause Temporarily

Kotak Mahindra Bank delivered a steady Q3FY26 performance, broadly aligning with Street expectations. Net Interest Income (NII) stood at Rs 75.6 billion, marginally below estimates but supported by healthy loan growth. Pre-Provision Operating Profit (PPOP) missed estimates modestly due to elevated operating expenses, while net profit of Rs 34.5 billion was broadly in line.

Net Interest Margin (NIM) remained flat sequentially at 4.54%, weighed down by the deployment of excess short-term liquidity into treasury assets. Importantly, funding costs declined sharply, offering a base for margin recovery in coming quarters.

Unsecured Asset Quality Improves, Credit Costs on a Downward Glidepath

The most reassuring takeaway from the quarter was the visible improvement in unsecured asset quality. Credit costs declined to 66 basis points, down from 81 bps in Q2, reflecting easing stress in the microfinance (MFI) and personal loan portfolios. Stress in the credit card segment has largely plateaued, while early warning indicators remain under close monitoring.

Management expects credit costs to continue trending downward until Q1FY27 before settling modestly above pre-COVID levels, given the structurally higher share of unsecured loans. Importantly, the expected impact of transitioning to an Expected Credit Loss (ECL) framework is estimated at less than 2% of net worth, limiting balance-sheet disruption.

Loan Mix Evolution Becomes the Primary Margin Lever

Margin expansion from here on will be driven less by rates and more by portfolio composition. While the full benefit of the June 2025 rate cut is yet to flow into asset yields, declining term-deposit costs, partial CRR relief, and seasonal accrual benefits are expected to support NIMs in Q4FY26.

Beyond near-term factors, Axis Securities highlights that sustained NIM improvement will hinge on a rising share of higher-yielding unsecured loans, particularly credit cards, personal loans, and MFI products. Management expects margins to stabilise in FY27, with upside skewed to the unsecured growth trajectory.

Deposits: Granularity and Stability Remain Strategic Priorities

Deposit mobilisation remained healthy, though CASA growth moderated. Total deposits rose 15% YoY, driven primarily by term deposits, while CASA growth stood at 12% YoY, resulting in a marginal decline in CASA ratio to 41.3%.

Kotak continues to pursue a three-pronged deposit strategy—consumption-led offerings, investment-linked products, and asset-linked cross-selling. The bank is also consciously reducing LIBOR-linked balances and building a granular, retail-focused savings account base through its 811 digital channel, enhancing funding stability over the cycle.

Operating Costs Rise, But Efficiency Levers Stay Intact

Operating expenses rose sequentially, temporarily pressuring cost ratios. The cost-to-income ratio increased to 48.3%, reflecting one-time employee cost adjustments related to revised labour laws and seasonally higher marketing spend.

Excluding these one-offs, cost trends remain controlled. Management expects technology-driven efficiencies and automation to partially offset higher acquisition costs as unsecured growth accelerates. Over the medium term, the bank aims to bring the cost-to-assets ratio down toward the 2.5–2.6% range.

Growth Engines: Unsecured Lending Ready for Acceleration

Overall advances grew 16% YoY, with growth momentum set to broaden. While secured retail and corporate lending anchored Q3 growth, unsecured segments are now positioned for an acceleration phase.

Kotak has revamped its credit card offerings and is witnessing encouraging early traction in spends and customer acquisition. Digital origination continues to drive salaried personal loans, while the acquired Standard Chartered personal loan book is outperforming expectations. In microfinance, portfolio contraction has stabilised, with management guiding for healthier disbursements in Q4.

Axis Securities expects overall credit growth of approximately 17% CAGR over FY26–28, supported by a gradual improvement in unsecured mix.

Financial Outlook: Earnings Visibility Strengthens Despite Estimate Tweaks

Axis Securities has marginally trimmed earnings estimates to reflect timing shifts rather than structural weakness. NII estimates have been reduced by 3–4% over FY26–28, while PAT estimates are lowered by 2–7% to factor in margin normalisation and higher operating investments.

Even so, Kotak is expected to deliver robust financial metrics, with RoA improving to 2.1–2.2% and RoE stabilising in the 12–14% range over FY27–28—metrics that remain best-in-class within the private banking space.

Valuation Framework: SOTP Supports Rs 515 Target

Axis Securities values Kotak Mahindra Bank at 2.5x Sep’27E adjusted book value. Subsidiaries, including Kotak Securities, Kotak AMC, and Kotak Life, are valued at Rs 136 per share on a sum-of-the-parts basis after applying a holding-company discount.

This results in a fair value of Rs 515 per share, unchanged from earlier estimates, offering 22% upside from the current market price of Rs 423.

Key Investment Risks to Monitor

While the medium-term outlook remains constructive, risks persist. A slowdown in overall credit demand could dampen earnings momentum, while faster-than-expected unsecured expansion may test asset-quality thresholds if underwriting discipline slips. Margin recovery is also sensitive to deposit repricing dynamics and competitive intensity.

Investment View: BUY Maintained

Axis Securities reiterates its BUY recommendation on Kotak Mahindra Bank. With unsecured stress normalising, margins poised for gradual recovery, and profitability metrics set to strengthen, the bank remains well positioned to deliver high-quality growth while preserving balance-sheet strength.

Target Price: Rs 515
Current Price: Rs 423
Upside Potential: 22%