Kotak Bank sees margins stabilizing as FCNR drag offsets repo gains
Kotak Mahindra Bank expects its net interest margin (NIM) to remain around the second-quarter level in the coming quarters as the full impact of high-cost foreign currency non-resident bank or FCNR(B) deposits is offset by the repricing of repo-linked loans and the deployment of surplus funds into higher-yielding customer assets, outgoing managing director and chief executive office Ashok Vaswani said.
“We will see margins in the same region as Q2,” Vaswani said while answering a question during the bank’s September-quarter earnings call on Saturday. He said the impact of FCNR(B) deposits would continue into the third and fourth quarters of FY27.
Margin pressure
For the quarter ended September, the bank’s NIM fell to 4.31% from 4.53% in the previous quarter and 4.54% a year earlier.
FCNR(B) deposits and advances against them contributed about 15 basis points to the sequential decline of 22 basis points, while day-count variation and the repayment of inter-bank participation certificate (IBPC) borrowings accounted for the remainder, chief financial officer Devang Gheewalla said.
As part of a wider push to attract dollars into India and prop up a sagging rupee, the Reserve Bank of India (RBI) on 5 June had announced subsidized windows to tap overseas debt. While the FCNR(B) deposit scheme ended preemptively on 31 August, those for external commercial borrowings (ECB) and overseas foreign currency borrowings remain open till 31 December.
Till 18 September, these windows had led to inflows of $143.6 billion, with 93% coming through FCNR deposits, RBI data showed.
Kotak Bank mobilized around ₹55,344 crore through FCNR(B) deposits. Of this, ₹16,110 crore was deployed as advances against the deposits, while part of the funds was used to finance the loan portfolio transferred from Kotak Mahindra Investments Ltd and replace relatively expensive IBPC borrowings. The remaining liquidity will be deployed over the next few quarters, Gheewalla said.
About 60% of the bank’s advances are repo-linked, allowing higher interest rates to feed through as loans are repriced. Management said the full impact of repo transmission should be reflected in margins in Q4, while deploying FCNR funds would take a few quarters.
Growth and earnings
Total deposits grew 23% year-on-year to ₹6.51 trillion, or 13% excluding FCNR(B) deposits. Average deposits increased 19% to ₹6.06 trillion. Net advances grew 25% to ₹5.77 trillion, or 19% excluding advances against FCNR(B) deposits and the acquired loan portfolio.
Customer assets, including credit substitutes, stood at ₹6.27 trillion, up 23% year-on-year. The CASA ratio declined to 38.2% from 42.3% a year earlier, while the cost of funds improved to 4.52% from 4.70%.
Net interest income (NII) rose 16% year-on-year to ₹8,459 crore in Q2, while net profit increased 29% to ₹4,212 crore.
Gross non-performing assets ratio of the bank fell to 1.04% from 1.18% a quarter ago and 1.39% a year earlier, while net NPA ratio declined to 0.24% from 0.27% a quarter and 0.32% a year ago.
Management said it was not seeing broad-based stress across its portfolios but remained watchful amid difficult conditions. In tractor financing, it flagged a 13% rainfall deficit as a concern in some regions, while saying the portfolio was performing well and there was no immediate impact.
“We do watch the weather condition,” management said, adding that the bank would remain vigilant as conditions evolved. Collection efficiency in the small commercial vehicle portfolio was also improving month-on-month.
Festive demand remained steady overall, though the bank said it would monitor regional variations and rural conditions closely.
