Kotak Mahindra Bank Q2 FY26 Earnings: Improved Asset Quality Masks Profit Headwinds

Kotak Mahindra Bank has announced its financial results for the second quarter of the fiscal year 2026 (Q2 FY26), reporting a consolidated net profit of ₹4,468 crore. While the headline profit figure reflects the bank’s diversified revenue streams, the quarter was primarily characterized by a significant improvement in asset quality, evidenced by a substantial decline in fresh slippages, a key indicator of emerging stress in the loan book.

Key Financial Performance Highlights

The bank’s consolidated net profit for Q2 FY26 stood at ₹4,468 crore. However, this represents an approximately 11% year-on-year (YoY) decline compared to the consolidated net profit of ₹5,044 crore reported in Q2 FY25. The decline is largely attributed to higher provisions and a subdued operating environment for certain segments.

• Net Interest Income (NII): The bank’s core income stream, NII, showed resilience, rising approximately 4% YoY to ₹7,311 crore in Q2 FY26 from ₹7,020 crore in the same period last year. This growth was underpinned by healthy loan book expansion.
• Loan and Deposit Growth: The quarter saw robust growth in both the loan book and deposits. Net Advances grew by a healthy 16% YoY to reach ₹4.62 lakh crore, while Total Deposits expanded by 14% YoY to ₹5.10 lakh crore. The sustained growth in deposits, particularly a 20% rise in term deposits, is crucial for maintaining a stable funding base in a rising interest rate environment.

Significant Improvement in Asset Quality

The most notable positive takeaway from the Q2 FY26 results is the substantial improvement in asset quality metrics, signalling a strengthening of the bank’s loan book health.

Falling Fresh Slippages

Kotak Mahindra Bank successfully contained the inflow of new bad loans, reporting fresh slippages of ₹1,629 crore in Q2 FY26. This marks a meaningful sequential and annual improvement:

• Sequential Drop: Slippages were lower compared to the ₹1,812 crore reported in the preceding quarter (Q1 FY26).
• Annual Drop: The figure is also significantly lower than the ₹1,875 crore recorded in Q2 FY25, indicating that the elevated stress seen in some segments, such as microfinance and commercial vehicle financing, in earlier quarters is now easing.

Reduced NPA Ratios

The sustained efforts in managing asset quality translated into better Non-Performing Asset (NPA) ratios:

• Gross NPA (GNPA) Ratio: This improved to 1.39% as of September 30, 2025, down from 1.49% in the year-ago period.
• Net NPA (NNPA) Ratio: The Net NPA ratio also showed an encouraging decline to 0.32%, compared to 0.43% in Q2 FY25, reflecting a higher provision coverage.

Headwinds: Provisions and Margins

Despite the operational strength in loan growth and asset quality, the bank’s profitability faced challenges primarily due to higher provisioning and contraction in Net Interest Margin (NIM).

• Increased Provisions: Provisions and contingencies for the quarter saw a considerable year-on-year increase, rising to ₹947 crore from ₹665 crore in Q2 FY25. This elevated provisioning acts as a dampener on net profit despite stable core income.
• Net Interest Margin (NIM) Contraction: The bank’s NIM, a key metric for profitability, narrowed to 4.54% in Q2 FY26. This contraction is a reflection of the higher cost of funds, as the bank has had to raise deposit rates to compete for a stable funding base.

Strong Subsidiary and Balance Sheet Performance

The bank’s diversified model continued to deliver, with subsidiary performance bolstering the overall consolidated result.

• Subsidiary Contribution: The Asset Management business delivered strong growth, while the Corporate/Wholesale Banking segment also showed a healthy increase in revenue. The performance of these subsidiaries is a crucial factor contributing to the consolidated profit figure of ₹4,468 crore.
• Capital Adequacy: Kotak Mahindra Bank maintains a robust balance sheet, with a Capital Adequacy Ratio (CAR) of 22.8% under Basel III norms, significantly above the regulatory requirement. This strong capital buffer provides ample room for future growth and absorbs potential risks. The Average Liquidity Coverage Ratio (LCR) also remained healthy at 132%.

In summary, Kotak Mahindra Bank’s Q2 FY26 results present a mixed picture. The management’s focus on asset quality is clearly yielding results with a drop in fresh slippages and improved NPA ratios. However, the pressure on margins due to high funding costs and the need for elevated provisions continue to weigh on the overall net profit. The solid growth in advances and deposits, combined with a strong capital position, nevertheless, positions the bank for sustained long-term growth.