Kotak Mahindra Bank expects its net interest margins to gradually improve in the second half of the fiscal year as the impact of lower deposit costs begins to reflect, Group Chief Financial Officer Devang Gheewall said.
During the bank’s Q2 earnings media call, the management said that the full benefit of deposit rate cuts would start flowing through over the next two quarters, helping offset the impact of the Reserve Bank of India’s earlier repo rate cuts on its margins.
“Assuming no further rate cuts, the effect of the repo rate cut has already been reflected in Q2. As deposits start getting repriced at lower rates, we will see gradual improvement in margins in Q3 as well as Q4,” the management said.
Kotak had earlier reduced both its savings account and term deposit rates in response to the central bank’s policy rate cuts. The average tenure of its deposits is between nine to twelve months, meaning the benefit of these rate reductions will be realized progressively as existing deposits mature and are repriced at lower costs.
The bank’s net interest margin compressed to 4.54% during the September quarter, a level that management acknowledged has become the “new normal” in the near term given the repricing lag between loans and deposits. The net interest margin (NIM) for the April-June quarter of the 2025-26 fiscal year stood at 4.65%.
Around 70% of the bank’s loan book is linked to the repo rate, making it immediately sensitive to changes in the policy rate.
“The repo rate affects the entire portfolio at the time it’s announced, while deposit repricing takes time. As deposits get repriced lower over the next two quarters, we expect an upward trend in margins,” the management said.
However, the bank also pointed to emerging concerns in specific retail lending segments. Management indicated some stress could arise in the retail commercial vehicle portfolio, though the overall asset quality remains stable for now.
For the quarter ended September, the bank’s loan book grew 16% year-on-year to ₹4.62 lakh crore. Of this, unsecured retail advances, including retail microcredit, were at 9.2% as compared to 9.7% a quarter ago.
While the commercial vehicle and commercial equipment segments rose 12% year-on-year basis, agriculture finance was up 10% and tractor finance book increased by 17%.
The asset quality of the bank worsened, with the gross non-performing assets ratio declining to 1.39% as compared to 1.48% at the end of June. Net NPA fell to 0.34% at the end of September as compared to 0.34% in the prior quarter.
During the quarter, the bank’s net profit declined 3% to ₹3,253 crore. Net interest income rose 2% on year to ₹9,900 crore.
The dip in the bank’s bottom line is due to higher provisioning and lower income contribution from its subsidiaries. Kotak Life Insurance, in particular, was hit by the introduction of Goods and Services Tax (GST) on life insurance premiums from September 22, which impacted profitability.
The bank’s capital market subsidiary also reported weaker earnings amid a fall in both cash and derivatives trading volumes during the quarter, though Kotak Securities gained market share, positioning it for a rebound when market activity normalizes.
Kotak’s management refrained from commenting on market speculation about potential interest in bidding for IDBI Bank, saying it evaluates “every single opportunity” but would not comment on specific deals.
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