Kotak Mahindra Bank grew its advances and deposits by around 14% each year-on-year in the June quarter (Q1FY26). However, its general banking fees crawled up by just 1% to ₹1,808 crore, indicating that the expansion in business has not translated into higher fee income. The reason could be a reduction in charges on the asset side, like loan processing fees, as well as on the liability side, like service charges for bank accounts, in a bid to retain and attract new customers.
Investors could well have hoped for higher fee income as net interest income (NII) growth is difficult to come through in a low-interest-rate environment. NII growth of 6% to ₹6,577 crore was barely half of the growth in interest-earning assets–including advances and investments. The gains from lower funding costs are unlikely in FY26, with the average tenure of term deposits for the bank being 9-12 months.
Net interest margin was 4.65% for Q1FY26, down 32 basis points quarter-on-quarter. While it will dip further in Q2 as the effect of the 50 bps repo rate cut in June kicks in, the future trajectory will depend on the repo rate cycle.
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Higher operating expenses
Operating expenses increased by 5.7% year-on-year, outpacing the 4.7% growth in core net income, i.e. NII plus fee income. The cost of bad loans or provisions doubled to ₹1,200 crore. The management attributed the rise in provisions to the stress in microfinance loans and stated that this could be the peak provisioning in the segment.
Some bad loan signs are emerging in goods transportation vehicle loans. As the management does not share segment-wise slippage amounts and provisions, it is difficult to gauge whether overall provisioning has peaked out. The sharp jump in provisions led to a 9% fall in profit before tax (excluding trading gains) to ₹4,161 crore. Going by the trend in fresh additions to gross non-performing assets (NPAs) or slippages that were up 22% QoQ to ₹1,812 crore and lower recoveries from old NPAs, the provisioning is likely to stay elevated in the near future.
Kotak Bank’s return on average equity (RoAE), at 11.5% (on core net worth after excluding reserves for securities meant for available for sale or the AFS category), was lower than that of the top two private banks in Q1FY26. ICICI Bank and HDFC Bank reported the metric at 17% and 14%, respectively, for the standalone bank.
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One reason for the comparatively poor RoAE is Kotak’s low multiple of total assets to net worth, also known as equity leverage, of 5.6x as on June 2025, whereas the same for the other two banks is in excess of 7x. A higher ratio implies the bank is more leveraged–i.e. it’s using more borrowed funds, including deposits, relative to its net worth–whereas a lower ratio suggests a more conservative capital approach.
While conservatism may be good to a certain extent, it affects RoAE adversely. In this context, Kotak Bank’s valuation discount to the top two private banks is justified. The bank’s stock is trading at a price-to-adjusted-book-value of 1.8x of FY27 based on estimates of Yes Securities after deducting the valuation of subsidiaries at ₹819 per share. If a similar valuation exercise is done for ICICI and HDFC based on Yes’s estimates, they are trading at 2.4x and 2.2x of FY27.
