The bank is prioritising safer assets over higher margins
Kotak Mahindra Bank finds itself in an unusual predicament: it’s growing faster than most of its rivals, yet analysts are trimming their earnings forecasts.
The Mumbai-based lender reported third-quarter profits of ₹3,450 crore, up a modest 4% from last year. At first glance, decent numbers. But dig deeper into where the growth is coming from, and a more nuanced picture emerges.
The Safety-First Strategy
Kotak is experiencing what bankers call an unfavorable “product mix shift”—but there’s a silver lining that’s often overlooked. Yes, it’s selling more of the low-margin items and less of the high-margin ones, but those low-margin products are also significantly safer.
The bank’s loan book grew a robust 16% year-over-year to ₹5 lakh crore. Impressive, certainly. But here’s the crucial detail: the growth has an increase in mix of home loans a segment that yields lower interest rates but also carries substantially lower default risk. Meanwhile, the higher-yielding unsecured loans like personal loans and credit cards actually shrank 1.6% over the year.
What Analysts Are Saying—And Pricing In
This strategic shift is now reflecting in revised price targets. Antique Stock Broking has cut their target price from ₹510 to ₹495, primarily due to margin pressure from the product mix change. They’ve reduced FY26/27/28 earnings estimates by 1%/7%/6% respectively, explaining: “We cut FY26/27/28 earnings estimates by -1%/-7%/-6%, mainly led by (i) Reduction in margin estimates due to a stronger growth seen in lower yielding segments of wholesale and home loans in recent quarters and growth remaining subdued in higher yielding unsecured credit, (ii) Reduction in fee income.”
Nirmal Bang, meanwhile, has marginally raised their target from ₹510 to ₹524, valuing the standalone bank at 2.5 times December 2027 book value—a substantial 32% discount to its five-year average of 3.7x. They note: “We have valued the standalone business at 2.5x Dec 2027E ABV (same as earlier), which is at a discount of 32.4% to its 5-year mean P/ABV of 3.7x. Adding subsidiary value per share of Rs 122, we derive our target price of Rs 524.”
While the “Buy” ratings remain despite the tempered price targets, it also suggests that while near-term profitability may disappoint, the long-term franchise value remains intact. The discount to historical valuations essentially prices in the margin compression risk while offering upside if—and when—Kotak can rebalance its portfolio toward more profitable segments.
As Antique notes in their detailed analysis: “Higher yielding unsecured mix has reduced by -160 bps YTD and lower yielding (home loans + wholesale) mix has increased by +190 bps YTD.”
The Margin Squeeze
This shift is already impacting what bankers call Net Interest Margin (NIM)—essentially, the difference between what a bank earns on loans and what it pays on deposits.
Kotak’s NIM held steady at 4.54% this quarter, but that stability masks an underlying challenge. Funding costs (what the bank pays depositors) actually fell by 16 basis points—that should have boosted margins. Instead, the yield on advances (what borrowers pay the bank) also declined by a similar amount, negating any benefit.
Nirmal Bang’s report captures the dynamics: “Cost of funds stood at 4.54% in 3QFY26 as against 4.7% in 2QFY26 and 5.06% in 3QFY25.” The bank is paying less for deposits, yet margins aren’t expanding because it’s deploying funds into lower-yielding but safer assets.
Antique Stock Broking projects continued pressure: “Overall, we expect margins to remain under pressure in the near to medium term due to subdued growth in higher yielding unsecured credit and stronger growth seen in its lower yielding segments.”
The Validation: Asset Quality Improves
The proof that this strategy is working lies in Kotak’s asset quality metrics.
Bad loans (GNPAs, or Gross Non-Performing Assets) declined from 1.4% to 1.3% of total loans. More encouragingly, the bank’s “slippage ratio”—the rate at which good loans turn bad—dropped to 1.34% from 1.41% the previous quarter.
As Nirmal Bang observes: “Credit card delinquencies have plateaued, while PL and microfinance credit costs have started declining.”
The bank set aside ₹810 crore for potential loan losses this quarter, down 14.5% from last quarter.
Credit costs—the actual expense of bad loans—moderated to 0.63% from 0.79% quarter-over-quarter, a 16 basis point improvement. Antique notes: “Overall asset quality outcome was positive as key metrics improved sequentially-(i) Gross slippage ratio reduced to 1.55% vs. 1.63% in 2QFY26 led by reduction in unsecured credit slippage. (ii) Reported credit costs also reduced to 63 bps vs. 79 bps QoQ/ 68 bps YoY.”
The Profitability Trajectory
Looking ahead, the earnings outlook is mixed. Nirmal Bang projects “an earnings CAGR of 6.2% over FY25-FY28E which results in RoA/RoE of 2.1%/12.3% in FY28E.” That’s respectable but not spectacular for a private sector bank.
The bank currently reports “9MFY26 RoA/RoE of 1.9%/10.7%,” according to Antique, with room for improvement as asset quality stabilizes and operating leverage improves.
Fee income remains a pressure point. As Antique notes: “Fee/assets increased marginally to 1.42% vs. 1.38% in 2Q, however, it remains lower than the 1.5% levels seen in FY24/25.” This suggests ancillary revenue streams haven’t fully recovered.
Operating expenses also ticked up. “Opex/assets (ex. labor code impact of INR 960 mn in 3Q) increased to 2.74% vs. 2.71% in 2Q,” indicating margin pressure from multiple directions—both on the revenue and cost sides.
