Kotak Mahindra Bank’s Q1 profit growth flat, asset quality shows early strain

New Delhi: Kotak Mahindra Bank’s first-quarter results for FY 2026 reveal a painfully tepid earnings trajectory and emerging cracks in asset quality, raising fresh questions about the bank’s ability to sustain its recent growth momentum.

Despite a 13 per cent year-on-year jump in consolidated customer assets to Rs 5,57,369 crore, profit after tax (PAT) in Q1FY26 inched up just 1 per cent to Rs 4,472 crore from Rs 4,435 crore a year ago (excluding a one-off gain on the KGI divestment in Q1FY25). At the parent-bank level, standalone PAT actually fell 6.8 per cent, from Rs 3,520 crore to Rs 3,282 crore, the first sequential dip in core profitability in two years.

Earnings under pressure

Net interest income rose a modest 6 per cent to Rs 7,259 crore on the back of a 14 per cent increase in advances, but the bank’s net interest margin (NIM) remained stuck at 4.65 per cent, suggesting limited pricing power amid a competitive lending environment. 

Fee income was equally stagnant at Rs 2,249 crore, up only 0.4 per cent year-on-year, even as most peers reported double-digit fee growth. Operating profit gained 6 per cent to Rs 5,564 crore, but the uptick failed to translate into commensurate bottom-line growth, as higher provisions and a 5.01 per cent cost of funds weighed on returns.

Rising credit costs and slipping asset quality

Kotak’s gross non-performing asset (GNPA) ratio rose to 1.48 per cent in Q1 from 1.39 per cent a year earlier, while net NPAs ticked up slightly to 0.34 per cent. The bank’s provision coverage ratio eased to 77 per cent, leaving less cushion against future slippages. 

Management attributed higher provisioning partly to RBI-mandated revaluation of investment portfolios, which delivered a one-time Rs 204 crore gain; stripping that out would have left headline PAT even weaker.

The credit-to-deposit ratio climbed to 86.7 per cent, reflecting aggressive loan growth, while the CASA (current and savings account) ratio dipped marginally to 40.9 per cent. Heavy reliance on term deposits and non-core borrowings has pushed the cost of funds above five per cent, narrowing spreads and squeezing net interest margins.

Subsidiary performance fails to impress

Contributions from key subsidiaries offered little respite. Kotak Securities’ PAT rose to Rs 465 crore (from Rs 400 crore), and Kotak Mahindra Life Insurance and Kotak Asset Management both delivered strong double-digit growth; however, Kotak Mahindra Prime’s profit grew modestly to Rs 272 crore (up 17 percent), while Kotak Mahindra Investments’ PAT fell to Rs 107 crore from Rs 138 crore.

Capital adequacy remains strong, but RoE flags

On the upside, Kotak’s consolidated capital adequacy ratio stands at a robust 23.7 per cent (CET I at 22.7 per cent), and annualised return on equity (RoE) was 11.13 per cent. Yet this RoE falls short of the bank’s mid-teens target and lags rival private banks, which consistently deliver 14-16 per cent RoE. Annualised return on assets (RoA) was 2.03 per cent, down from the bank’s historical threshold of around 2.3 per cent.

Outlook and challenges

Kotak’s heavy focus on retail and small-ticket corporate loans drove a 14 per cent rise in advances to Rs 4,44,823 crore, but slower growth in CASA deposits and higher funding costs risk undermining lending margins. With competition intensifying from large private banks and new-age digital lenders, Kotak’s ability to defend margins and contain fresh slippages will be critical.

Investors will also watch for management’s next steps on cost control, operating expenses rose 7 per cent despite tepid revenue growth, and provisioning buffers as asset quality shows early signs of strain. Unless the bank can revive fee growth, lift CASA ratios and arrest margin erosion, sustaining mid-teens RoE targets in FY 2026 will remain an uphill battle.