‘Unignorable Setup’ Says Morgan Stanley For Kotak Mahindra Bank – Here’s Why

Kotak Mahindra Bank Ltd. is best set up to generate growth in an improving economy, Morgan Stanley said on Tuesday, noting that “The loan book is well diversified, with leverage to commercial banking, vehicle financing, and unsecured loans. Incremental spreads will improve and aid faster loan growth. We expect strong compounding and re-rating.”

Morgan Stanley believes that Kotak Bank has the best setup after two years of challenges. In two years, the bank navigated management transition, RBI embargo limiting unsecured loan growth, and asset quality issues in the MFI segment. This, amid a tough macro climate and high competition, limited growth acceleration. However, these factors look to be turning around. “Loan disbursement run-rates are rising, NIMs adjustment to lower rates is mostly done, and MFI asset quality challenges have peaked,” the brokerage noted.

Historically, Kotak Mahindra has "significantly accelerated loan growth when macro conditions improved. The bank has shown steady loan growth in secured retail and SME/corporate banking," the brokerage said.

The slowdown was in unsecured and vehicle financing. "Unsecured disbursement run-rate is rising thanks to lower asset quality concerns and the ending of the RBI embargo," Morgan Stanley said. "If the economy improves, we think the bank will enjoy a strong rebound in commercial vehicles financing. With better system liquidity, deposit growth acceleration should not be a problem," it further added.

Morgan Stanley has reiterated its 'Overweight' rating on Kotak Mahindra Bank, with a price target of Rs 2,600. The brokerage views Kotak as a unique play on India's financial services sector, citing its 100% ownership of all capital markets and insurance subsidiaries.

"The balance sheet is strong and profitability is high - 1QF26 RoA was 1.9% despite near trough margins and peak credit costs even thoughs Kotak Bank did not book any big treasury gains, unlike peers," the brokerage noted.