Kotak Mahindra Bank Ltd’s customer assets rose 13% year-on-year to ₹5.09 trillion in the September quarter (Q2FY26). Yet, its common equity tier (CET)-1 ratio remains a hefty 20.9%, only marginally lower than 21.5% in Q2FY25. CET-1, which includes core equity capital and retained earnings, is significantly higher than that of ICICI Bank Ltd (15%) and HDFC Bank Ltd (17%). This excess capital is a key reason Kotak’s return on average equity (RoAE) lags peers—at 10.4% versus a minimum of 14% for HDFC Bank , ICICI Bank, and State Bank of India Ltd (SBI).
During the earnings call, Kotak Mahindra Bank CEO Ashok Vaswani pointed out that Indian banks are not allowed to do buybacks under the Reserve Bank of India’s (RBI) regulations—an avenue that could have improved RoAE. Now, if the bank truly aims to enhance shareholder returns, it could always consider raising its dividend payout ratio (the percentage of earnings per share paid as dividends to shareholders), thereby slowing the accretion to net worth and lifting RoAE.
HDFC’s dividend payout ratio stood at 25% in FY25, followed by SBI at 20% and ICICI at 16%. Kotak’s dividend payout ratio, by contrast was just about 3%. The management has also made clear that the bank won’t pursue acquisitions aggressively to deploy excess capital unless the opportunity is compelling.
For Q2FY26, the standout feature of Kotak’s performance was the disciplined cost control demonstrated by the bank. Operating expenses were flat year-on-year and fell 3% sequentially to ₹4,632 crore, driving a 7.8% year-on-year rise in core pre-provision operating profit to ₹5,094 crore—even though net interest income (NII) and core fee income were up just 4%.
The bank’s management attributed the cost control to lower acquisition cost of customers, operational efficiency gains, and some benefit on reduced retiral costs from rising government bond yields. However, the negative effect from rising bond yields led to a treasury loss of ₹128 crore versus a gain of ₹91 crore a year earlier. Consequently, net profit slipped 2.7% to ₹3,254 crore.
Outlook brightens
Despite the subdued Q2FY26 show, the outlook for H2FY26 appears better on two counts: NII growth and credit costs. The management said net interest margin (NIM) should hold at the current 4.54% level if the RBI refrains from further rate cuts. This could also mean that the margin pressure due to the shift in favour of secured lending, which fetches lower yields, versus unsecured loans, may be easing.
It’s worth noting that between Q4FY25 and Q2FY26, Kotak’s NIM contracted a steep 43 basis points (bps), compared with just 11 bps for ICICI Bank and 27 bps for HDFC Bank. With assets growing a healthy 13% in H1FY26, NIM stabilization could help revive NII growth in H2FY26.
Credit costs, too, seem to have bottomed out. Fresh slippages (addition to gross NPAs) have declined 13% year-on-year and 10% sequentially to ₹1,629 core in Q2FY26. Lower slippages in absolute terms reduces the need for writing off or making provisions for bad assets, thus boosting profitability. In fact, provisions declined 22% quarter-on-quarter in Q2, though they remained higher year-on-year.
To be sure, Kotak must improve its RoAE not just in H2FY26, but over the long term if it wants to bridge the valuation gap with HDFC Bank and ICICI Bank. Kotak trades at a price-to-adjusted-book-value of 2.2x (after accounting for the value of subsidiaries) based on Motilal Oswal Financial Securities’ estimates for FY26, while the other two peers are at 2.5x.
