Built on discipline, poised for more? The case for Kotak Mahindra Bank 2.0

Indian Express

3 days ago

What do you think of when you hear the name Kotak Mahindra Bank? For a lot of investors, it means being disciplined, careful, and consistent. People have thought of it as a stock that you buy and forget about because it doesn't give you quick returns, but it does keep growing over time.
That reputation was well-deserved for a long time.
Kotak was one of the best private sector banks in India from 2005 to 2015, with an annual return of 35%. The stock continued to grow at a respectable 12% per year from 2015 to 2025.
But if you look more closely, the picture is more complicated.
From 2015 to 2020, Kotak's stock continued to do well, growing at a rate of about 16% annually. But since 2020, things have slowed down. Returns have dropped to less than 5% a year in the last five years.
In the same period, ICICI Bank had a CAGR of more than 16%, while Axis Bank had a return of more than 10%. That comparison, while not the whole story, raises a tough but important question: has Kotak lost its edge?
The basics still seem strong. The quality of the assets is solid. Capital buffers are still strong. The bank also continues to follow long-term rules. But in a market that is rewarding speed, scale, and risk-taking in everything, from unsecured lending to digital growth, Kotak's careful approach is starting to feel less like a strength and more like a drag.
So what does that mean for investors who want to hold on to their investments for a long time? Is Kotak still the quiet compounder it used to be? Or are we still telling the same story in a new market?
Kotak Mahindra Bank has always followed its path for growth. While other banks have pursued rapid loan growth, unsecured lending, and aggressive digital expansion, Kotak has opted for a cautious, capital-efficient, and selective approach. That core thinking has not changed. But what has changed is where Kotak is now choosing to grow.
In the fourth quarter of FY25, Kotak reported a consolidated profit after tax of Rs 4,933 crore, down 8% compared to Q4FY24. The full-year return on equity stood at 13.1%. While these numbers may not seem impressive at first glance, they reflect stability in a challenging environment.
The real shift, however, lies in the bank's loan mix.
Kotak, long known for its secured lending focus, is now expanding into unsecured retail segments. Home loans and vehicle finance remain important, but the bank is placing more emphasis on personal loans, SME, and digital lending.
Kotak's Current Account and Savings Account (CASA) ratio has traditionally been one of the highest in the industry. However, this advantage has started to fade.
As of March FY25, the CASA ratio stood at 43%, down from ~60% a few years earlier.
There are two main reasons for this decline. First, the bank was operating from a very high base. Second, many savers are now moving funds to fixed deposits that offer higher returns.
This shift has affected Kotak's funding cost and has led to some pressure on net interest margins, which have come down from 5.28% in Q4FY24 to 4.97% in Q4FY25.
To respond, the bank is expanding its branch network, which now exceeds 2,000 locations. It is also launching digital savings products and strengthening customer engagement to slow the CASA decline.
Kotak's move into unsecured lending is being done with clear limits in place.
As of FY25, unsecured loans make up 10.5% of the overall loan book. This segment grew, but it remains lower than most of its more aggressive competitors.
Key areas of focus include:
● Credit cards, through partnerships with digital platforms
● Consumer finance, including EMI-based products and co-lending
● Personal loans, primarily to salaried and self-employed individuals with strong credit profiles
Despite the increase in unsecured lending, credit costs have remained low.
For FY25, the credit cost stood at 64 basis points, slightly higher than 42 basis points in FY24 but still within a comfortable range and comparable to other leading private sector banks. This reflects the bank's continued discipline in underwriting and risk management.
Kotak's microfinance business, managed through BSS Microfinance, is being monitored carefully. The regulatory environment has tightened, and the ongoing election season has added some uncertainty.
Kotak is avoiding rapid growth in this segment. Instead, it is focusing on collections, customer engagement, and monitoring its rural portfolio, especially in the eastern and southern parts of the country.
With a Common Equity Tier 1 (CET1) ratio of 21.1%, Kotak is one of the best-capitalised banks in the country. This gives the bank plenty of room to grow. However, Kotak is choosing to use this capital carefully.
Unlike HDFC Bank, which has pursued a large merger, or ICICI Bank, which is growing its loan book quickly, Kotak is investing at its own pace. It is putting money into technology, building digital platforms such as Kotak811, and improving analytics. But it has stayed away from large acquisitions or heavy spending.
The message is clear. The bank is willing to grow, but only where the return justifies the risk.
Let us now look at how Kotak compares with other major private sector banks:
Kotak trades at a meaningful valuation premium to peers, especially when compared to ICICI or Axis, both of which are delivering higher ROEs and similar asset quality.
Kotak Mahindra Bank's capital adequacy remains among the highest, asset quality is well-managed, and the leadership has consistently avoided taking unnecessary risks in pursuit of growth. These strengths remain intact.
However, the broader market environment has changed. Investors today are rewarding institutions that are growing faster, scaling rapidly, and taking bolder steps in innovation.
While Kotak has started making changes by entering unsecured lending, investing in digital platforms, and focusing more on SME lending, it is still moving cautiously. This approach limits risk, but also keeps growth in check.
For investors, the key question is no longer about whether Kotak is safe. It is about whether Kotak can compound capital meaningfully in the years ahead. Over the last five years, Kotak has underperformed some peers. This is not because it made poor decisions, but because it moved more slowly.
Looking ahead, the bank's ability to deliver stronger returns will depend on two things: how quickly it can execute its new strategies and how far it is willing to expand its boundaries without compromising its long-standing principles.
Kotak Mahindra Bank is not in distress. But the earlier growth story may not repeat by default.
For long-term investors who value stability and consistency, Kotak still remains a reliable option. However, for those seeking higher growth or faster gains, the bank will need to demonstrate more tangible progress in the coming quarters.
Note: This article relies on data from annual and industry reports. We have used our assumptions for forecasting.
Parth Parikh has over a decade of experience in finance and research and currently heads the growth and content vertical at Finsire. He holds an FRM Charter and an MBA in Finance from Narsee Monjee Institute of Management Studies.
Disclosure: The writer and his dependents do not hold the stocks discussed in this article.
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