The result creates a deployment test
- Standalone profit
- ₹4,212 croreQ2 FY27, up 29% year on year.
- Net interest income
- ₹8,459 croreQ2 FY27, up 16% year on year.
- FCNR(B) deposits raised
- ₹55,344 croreMobilised under the Reserve Bank of India’s special foreign-exchange swap facility.
Kotak Mahindra Bank reported a 29% year-on-year rise in standalone profit to ₹4,212 crore on Saturday, October 24, helped by 16% growth in net interest income and lower provisions. Consolidated profit increased 26% to ₹5,645 crore. The result exceeded the ₹4,104 crore average standalone estimate compiled by LSEG.
The more consequential number was ₹55,344 crore. Kotak raised that amount in Foreign Currency Non-Resident Bank deposits under the Reserve Bank of India’s special swap facility. The programme allows banks to obtain rupees against eligible foreign-currency deposits while limiting the associated currency risk. The inflow equalled 9.7% of Kotak’s June deposit base, according to chief executive Ashok Vaswani.
The deposits lifted period-end deposit growth to 23%, but growth was only 13% without them. Net advances rose 25%, or 19% after excluding loans against the foreign-currency deposits and a portfolio transferred from Kotak Mahindra Investments. Kotak’s latest figures therefore show strong core growth, but not growth of the scale implied by the unadjusted balance sheet.
The profit beat was genuine, but Kotak’s one-off funding inflow makes the underlying growth rate less striking than the headline suggests.
Cheap, long-dated funding has value only when Kotak can lend it at an adequate risk-adjusted spread.
Funding arrived before the assets
- Net interest margin
- 4.31%Down from 4.53% in Q1 FY27.
- Loans against FCNR(B) deposits
- ₹16,110 croreProvided through the bank’s international branches.
- Margin effect
- 15 basis pointsManagement’s estimate of the sequential decline attributable to FCNR(B) deposits and related loans.
Kotak’s net interest margin, the difference between its asset yield and funding cost relative to earning assets, fell by 22 basis points sequentially to 4.31%. Chief financial officer Devang Gheewalla attributed 15 basis points of that decline to the FCNR(B) programme and related advances. The full-quarter funding cost will appear in the December quarter, while deployment will take several quarters.
The bank has already made ₹16,110 crore of loans against the deposits. It also used the proceeds to fund an ₹8,915 crore loan portfolio transferred from Kotak Mahindra Investments and to reduce inter-bank participation certificate borrowing by ₹9,800 crore. Those uses replace funding or move assets within the group; they do not by themselves prove that Kotak can originate enough new loans at attractive spreads.
Cheap, long-dated funding has value only when Kotak can lend it at an adequate risk-adjusted spread. Deploying the money quickly would protect margins but could weaken underwriting. Waiting preserves credit discipline but leaves liquidity earning less than customer loans. The result transfers the main uncertainty from funding availability to asset selection.
Kotak has secured stable funding before finding all the loans to absorb it, temporarily depressing its lending spread.
Credit quality made the profit credible
- Provisions
- ₹803 croreDown 15% year on year, but up from ₹668 crore in Q1 FY27.
- Gross bad-loan ratio
- 1.04%Down from 1.39% a year earlier.
- Fresh slippages
- ₹1,230 croreDown 24% year on year.
The earnings improvement was not merely a balance-sheet illusion. Operating profit increased 21% to ₹6,382 crore, while provisions fell 15% to ₹803 crore. Fresh slippages declined to ₹1,230 crore from ₹1,629 crore a year earlier. Gross non-performing assets fell to 1.04% of advances from 1.39%, and annualised credit cost declined to 0.35% from 0.79%.
Those figures suggest Kotak did not manufacture growth by accepting an immediate deterioration in reported credit quality. Its common equity tier-one ratio of 21.4% also leaves ample capacity to expand without near-term equity dilution. Fee and services income rose 21% to ₹2,926 crore, although it included ₹158 crore of processing fees connected with advances against FCNR(B) deposits.
The caution is that falling provisions supplied part of the 29% profit increase and cannot be repeated indefinitely. Provisions were also higher than the preceding quarter’s ₹668 crore. Kotak’s return on equity was 11.65%, up from 10.38% a year earlier but below 11.98% in the June quarter. The bank remains strongly capitalised, yet the return earned on that capital has not accelerated with reported balance-sheet growth.
Lower credit costs and operating leverage support the earnings, although part of the quarterly profit growth came from provisions that may not fall again.
The counter-case rests on patience
- Core advance growth
- 19%Excluding FCNR(B)-backed loans and the transferred Kotak Mahindra Investments portfolio.
- Capital adequacy ratio
- 21.9%Standalone Basel III ratio at September 30.
- Net bad-loan ratio
- 0.24%Down from 0.32% a year earlier.
The strongest case against caution is that Kotak captured a scarce funding opportunity rather than chasing loans first and deposits later. Vaswani called the programme a one-off opportunity that added longer-duration, fixed-rate funding. Excluding the exceptional inflow, current accounts grew 17% and fixed-rate savings deposits grew 14% on an average basis. The adjusted current and savings account ratio was 41.8%, up from 40.3% in June.
Kotak also said it repaid relatively expensive deposits and reduced short-term inter-bank funding. That can improve the stability of its balance sheet even when the immediate accounting effect is a lower margin. About 60% of advances are linked to the repo rate, according to Gheewalla, so higher benchmark-rate transmission could offset part of the funding drag as the deposits are deployed.
Credit quality strengthens that argument. Net bad loans were 0.24%, the provision coverage ratio was 78%, and the bank had a 21.9% capital adequacy ratio. A lender with excess capital, improving arrears and 19% adjusted advance growth can afford to wait for suitable borrowers. The margin decline may therefore be the cost of creating future capacity, not evidence that the deposit strategy failed.
The strongest answer to the margin concern is that Kotak exchanged a temporary earnings drag for longer-duration funding and greater control over future loan growth.
The next two quarters will settle it
- Last traded price
- ₹430.50Friday, October 23, before the Saturday results; the shares declined 1.49% that session.
- Next margin test
- Q3 FY27Management said Q3 will contain the full-quarter FCNR(B) funding effect.
- Expected repricing timing
- Q4 FY27Management expects the full effect of repo-linked loan repricing in Q4 FY27.
Kotak shares closed at ₹430.50 on Friday, October 23, down 1.49%. Because the bank released its results on Saturday, the market had not traded on the new information by Sunday evening. The first share-price response will therefore come on Monday, but one session cannot establish whether the funding strategy creates value.
Management did not give formal margin guidance. It said the December quarter would contain the full-quarter cost of the FCNR(B) mobilisation, partly offset by deployment into customer assets and repricing of repo-linked loans. Gheewalla expects the full repricing effect in the March quarter. That sequence implies a measurable test: net interest income must keep growing while the margin stabilises and credit costs remain controlled.
The deployment mix will matter as much as its pace. Kotak’s unsecured retail advances were 8.1% of the loan book, while management said recent unsecured growth came from microfinance, cards, personal loans and business loans. Faster deployment into those products could raise yields but also future loss rates. The decisive evidence will be Kotak’s Q3 and Q4 disclosures on margin, new slippages and credit cost, not the 29% profit increase already reported.
The December and March quarters must show whether asset deployment restores margin without reversing the improvement in slippages and credit costs.
Sources
- Kotak Mahindra Bank Announces Results · kotak.bank.in
- Transforming for scale · kotak.bank.in
- This information isn't available right now.
- This information isn't available right now.
- India's Kotak Bank Q2 profit rises 29%, beats estimates · in.marketscreener.com
- Kotak Mahindra Bank's Q2 consolidated net profit rises 26% to ₹5,645 crore · business-standard.com
- Apple Pay partnership may take place in a couple of quarters: Kotak Mahindra Bank CEO Ashok Vaswani · moneycontrol.com
- rbidocs.rbi.org.in › rdocs › notificationभारतीय रज़वर् बैंक · rbidocs.rbi.org.in
