Kotak Bank Faces Stock Decline After Q4 Earnings Report

Kotak Mahindra Bank has recently made headlines, but not in a favorable light. The bank’s stock plummeted by 6% in just one day following the announcement of its Q4 earnings, revealing a concerning 14% drop in profits compared to the previous year. This downturn has left investors questioning the bank’s future, especially given its past performance.

Overview of Kotak Bank’s Performance

For several years, Kotak Bank has struggled to keep pace with its rivals in the banking sector. Limited investor optimism has been attributed to regulatory challenges and a shift in leadership. Over the past five years, the bank has seen a 70% return, significantly trailing the 154% gain of the Nifty Private Bank Index. In the last three years, its performance has been equally lackluster, recording just 17% (unannualized) returns compared to the sector’s 51%.

Recently, however, Kotak Bank appeared to regain some investor confidence. Unfortunately, the latest quarterly report has cast a shadow on this recovery. Was the market’s reaction to the earnings report warranted, or is it an overreaction that could soon correct itself? Let’s delve into the details.

Analyzing the 6% Stock Drop

The Q4 earnings results were in line with expectations, showcasing a 5% year-on-year rise in net interest income and a 7% increase in other income. However, a significant spike in provisions marred the results, with provisions and contingencies soaring by an astonishing 245%, rising from Rs.264 crore in Q4 FY24 to Rs.909 crore in Q4 FY25.

This extra Rs.645 crore allocated for anticipated stress directly impacted profits, which fell from Rs.4,133 crore to Rs.3,552 crore—a decline that fueled the stock’s drop on Monday. Additionally, the bank experienced increased operating expenses and larger non-core incomes in the previous quarter, further complicating the year-on-year comparison.

Industry-Wide Stress Trends

The banking sector has faced challenges following the pandemic, as central banks globally relaxed monetary policies to stimulate growth. While liquidity surged, corporate credit growth stagnated, leading to a reliance on retail lending and microfinance—segments that have become highly competitive.

This has resulted in increased risks among borrowers with lower creditworthiness, prompting regulatory oversight and heightened risk-weight measures. Consequently, the lending industry is now grappling with rising stress in unsecured retail and microfinance sectors.

Signs of Recovery?

Despite the challenges, the lending landscape has begun to shift. The focus is now on sustainable growth and enhancing collection efficiencies. For instance, while the portfolio-at-risk for loans in the 31-180-day bucket increased from 4.3% to 6.4%, the 1-30-day bucket showed improvement, decreasing from 2.1% to 1.8%.

In Q4 FY25, Kotak Bank reported a robust 14% growth in net advances, driven by 31% growth in SME loans and 17% in consumer loans. However, the bank has strategically reduced its focus on the stressed retail microcredit segment, leading to a 33% decline in that area. As of March 2025, retail microcredit accounted for 10.5% of the bank’s advances, down from 11.8% the previous year.

Moreover, increased provisioning has improved the bank’s provision coverage ratio from 76% to 78%, despite a rise in slippages and gross NPA. Net NPA has also decreased from 0.34% to 0.31% year-on-year.

Kotak Bank’s Strong Position

Kotak Bank’s gross advances grew 14% year-on-year, maintaining a 15% CAGR over five years. The bank benefits from a conservative lending culture established by founder Uday Kotak, allowing it to weather industry-wide stress effectively.

While many banks struggle with rising unsecured lending stress and shrinking net interest margins (NIMs), Kotak Bank stands out. Its net NPA of 0.31% is the lowest among large-cap private banks. The bank’s deposits have also grown at a 14% CAGR, surpassing the industry average of 13%.

Future Prospects and Risks

After a 10-month ban on issuing credit cards and digital customer onboarding, lifted in February, Kotak Bank is poised for growth. Its unsecured retail loan portfolio aims to reach 15% of net advances, bolstered by cross-selling opportunities from a recent acquisition.

However, the bank faces challenges. Recent deposit growth of 15% was mainly due to a 25% increase in term deposits, while low-cost current and savings accounts showed sluggish growth. The CASA ratio has fallen from over 60% in FY21 to 43% in FY25, and the cost of funds has risen from 4.98% to 5.09% year-on-year.

Conclusion

Despite these challenges, Kotak Bank is trading at 2.36 times its book value, presenting an attractive entry point compared to the sector’s 2.6x valuation. Experts have projected a target price of Rs.2,500 per share, indicating over 20% potential upside from current levels. As the bank navigates through its current stresses, many believe it is at a pivotal moment for recovery and growth.

For those considering investment opportunities in banking stocks, Kotak Bank may offer a compelling option worth exploring. However, as always, potential investors should consult with financial advisors to tailor decisions to their individual investment strategies.