Kotak Mahindra Bank’s third-quarter performance for FY26 reinforces a familiar but increasingly convincing narrative: steady earnings delivery, disciplined balance sheet growth, and visible stabilization in asset quality. While headline margins remained flat and operating expenses ran slightly higher than expected, the bank compensated with resilient loan growth, declining slippages, and improving credit costs. Management commentary points to margin recovery beginning in the fourth quarter, supported by deposit repricing and regulatory tailwinds. With return ratios projected to normalize by FY27 and valuation comfort emerging at current levels, Kotak’s long-term compounding story remains intact, even as near-term execution stays measured.

Motilal Oswal Reiterates BUY as Earnings Track Expectations

Kotak Mahindra Bank reported a standalone profit after tax of Rs 34.5 billion for 3QFY26, marking 4.3% year-on-year growth and 5.9% sequential expansion, broadly in line with analyst expectations. Consolidated profits rose to Rs 49.2 billion, supported by contributions from subsidiaries across capital markets, insurance, and asset management.

The quarter did not deliver surprises, but it reinforced consistency. Net interest income, fee income, and asset quality trends aligned closely with forecasts, validating the bank’s conservative growth framework.

Net Interest Margins Hold Firm Despite Temporary Headwinds

Net interest income increased 5.1% YoY and 3.5% QoQ to Rs 75.6 billion, even as reported margins remained flat at 4.54%. Management clarified that margins were temporarily suppressed by a 4 basis-point drag from short-term IPO-related funds parked in treasury instruments.

Excluding this technical impact, adjusted margins would have stood closer to 4.58%. With term deposit repricing nearing completion and the benefit of CRR cuts expected in the coming quarter, the bank anticipates a gradual improvement and stabilization in margins from 1QFY27 onward.

Loan Growth Remains Broad-Based and Durable

Advances grew 16.1% YoY and 3.9% QoQ to approximately Rs 4.81 trillion, driven by healthy traction across home loans, business banking, SME lending, and select corporate segments. Retail mortgages continued to show resilience, while SME advances expanded at a high-teens pace.

Unsecured lending has resumed calibrated growth, reflecting tighter underwriting standards and improved collection efficiencies. Credit card balances declined marginally on a sequential basis, though management expects traction to improve following a revamp of the card proposition.

Deposit Momentum Holds, Though CASA Mix Softens

Deposits increased 14.6% YoY and 2.6% QoQ, supported by strength in term deposits, which grew over 16% YoY. CASA balances were largely flat sequentially, resulting in a 100-basis-point decline in CASA ratio to 41.3%.

The moderation in CASA is not structural, according to management, but reflective of competitive deposit pricing and seasonal liquidity flows. Initiatives such as Kotak 811, Solitaire banking, and asset-led liability sourcing are expected to support CASA accretion over the medium term.

Asset Quality Improves as Credit Costs Trend Lower

Slippages declined marginally to Rs 16.1 billion, while the gross NPA ratio improved to 1.3%, down 9 basis points sequentially. Net NPAs stood at a comfortable 0.31%, and the provision coverage ratio remained stable at around 76%.

Credit costs fell to 63 basis points, reflecting easing stress in the unsecured portfolio. Management indicated that the worst of the unsecured credit cycle is behind the bank, with further normalization expected through FY27.

Operating Costs Rise, But Structural Efficiency Intact

Operating expenses rose 8.3% YoY, partly due to a one-time Rs 955 million charge related to new labor code implementation. Excluding this impact, cost growth remained broadly aligned with business expansion.

The cost-to-income ratio increased to 48.3%, but analysts view this as a temporary deviation rather than a structural deterioration, given Kotak’s long-standing focus on operating discipline.

Subsidiaries Add Stability and Optionality

Kotak’s diversified financial services platform continued to contribute meaningfully to consolidated profits. Kotak Securities reported strong sequential growth, Kotak Life Insurance posted a sharp rebound, and the asset management arm maintained robust return ratios.

Subsidiaries accounted for nearly one-third of the bank’s target valuation, underscoring the importance of the group structure in Kotak’s sum-of-the-parts framework.

Return Ratios Set to Normalize by FY27

Motilal Oswal expects Kotak Mahindra Bank to deliver a return on assets of around 2% and a return on equity of approximately 12.5% by FY27, supported by margin normalization, stable credit costs, and operating leverage.

Loan growth is projected at nearly 16% CAGR over FY26–FY28, comfortably outpacing nominal GDP growth and reinforcing Kotak’s positioning among large private-sector banks.

Valuation Comfort Emerges at Current Levels

At the current market price of Rs 423, the stock trades at approximately 2.3x adjusted book value, which analysts consider reasonable given the bank’s balance sheet strength, capital adequacy, and earnings visibility.

Motilal Oswal values the stock at Rs 500, based on 2.3x Sep’27E adjusted book value, maintaining its BUY recommendation.

Downside risks appear limited, while upside is linked to faster-than-expected margin recovery and sustained asset quality improvements.

Investment View: Steady Compounding, Not Flashy Growth

Kotak Mahindra Bank may not offer headline-grabbing acceleration, but its value proposition lies in predictability, balance sheet resilience, and disciplined execution. As margin pressures ease and credit costs normalize, the bank is positioned to reassert its return profile without compromising risk standards.