Kotak Mahindra Bank shares fall after Q3 results; IIFL flags valuation concerns

Shares of private sector lender Kotak Mahindra Bank fell over 4% on Tuesday, January 27, even though its December quarter results broadly met expectations. The decline was attributed to higher employee costs under the new Labour Code, which resulted in a lower-than-expected profit after tax (PAT).

Net interest income (NII) grew 5% YoY, in line with estimates. The reported impact of ₹96 crore due to the new Labour Code moderated pre-provision operating profit (PPOP) growth to 8% YoY, below consensus. Provisions came in lower than expected, supporting a 7% YoY growth in PAT.

Net interest margins (NIMs) remained flat QoQ at 4.54%. Credit cost declined to 0.63% from 0.79% QoQ, a drop of 16 basis points.

Positives from the quarter

The bank saw sequential improvement in asset quality. Credit costs fell 16bp QoQ to 0.63%, outperforming expectations of a 7-8bp decline, aided by higher recoveries.

Slippage ratio improved to 1.34% from 1.41% QoQ.

What management said

Management indicated that microfinance and personal loan credit costs have started to decline. However, stress continues in the retail commercial vehicle segment. They expect a gradual improvement in overall credit costs through Q4FY26-Q1FY27.

What was a bit negative?

NIMs remained flat QoQ at 4.54%, below expectations of a 4-5bp improvement. Management attributed the muted margins to short-term liquidity management (impact of 4bp).

For Q4FY26, they expect moderate NIM improvement, supported by CRR cut benefits.

On acquisition

On mergers and acquisitions, the bank said any deal must be financially and strategically suitable, with smooth integration.

What are brokerages saying?

IIFL maintained an 'Add' rating with a price target of ₹485, citing that valuations remain unattractive relative to profitability.

Nomura gave a 'Neutral' rating with a price target of ₹460. It said that strong growth and easing credit costs drove a 2-3% EPS upgrade. While higher operating expenses led to a core PPOP miss, lower credit costs cushioned PAT.

Jefferies recommended 'Buy' with a price target of ₹530. Excluding one-off costs, standalone Q3 profit rose 6% YoY, ahead of estimates.

Loan growth of 16% and deposit growth of 15% outpaced peers such as HDFC and ICICI, although NII growth of 5% lagged.

The brokerage views Kotak's performance as on par with peers.

Management indicated that potential deals like IDBI are evaluated carefully but are not a current priority, suggesting lower deal probability.

Bernstein assigned a 'Market weight' rating with a price target of ₹490.

The brokerage cited a stable Q3 operating performance with stable asset quality and largely unchanged core profitability.

NIMs held steady at 4.54%, suggesting a potential end to the margin normalisation phase. Despite ongoing weakness in MFI and credit card segments, loan growth remained ahead of peers, and RoA stayed at 1.9%.