Brokerages upbeat on Kotak Bank's Q4 performance, but RBI resolution key for re-rating

Jefferies shared a 'hold' call on Kotak Mahindra Bank and reduced the target price to Rs 1,790 per share, saying that the RBI resolution and controlled mid-management is key to future performance.

Analysts at Emkay also maintained a 'reduce' rating on the private sector lender, saying that the regulatory hurdle could hurt business growth. They slashed the target price to Rs 1,625 per share from Rs 1,750.

"Though the management has outlined Rs 300-450 crore impact on profit-before-tax (PBT), we believe that the financial impact could be far higher as seen in HDFC Bank. The fulfillment of RBI's requirement for external audit followed by corrective measures to the regulator's satisfaction for lifting the ban is a task easier said than done," the brokerage firm said.

Ashok Vaswani, managing director and chief executive of Kotak Mahindra Bank, said that the regulatory action could have an impact of Rs 300-450 crore on the bank's PBT in FY25. "More than financial, we are worried about the reputational impact of the RBI action," he said in a post-earnings concall, after the RBI barred the lender from onboarding new customers through online banking channels or issuing new credit cards, citing deficiencies in its IT framework.

ALSO READ: JP Morgan upgrades Kotak Mahindra Bank to overweight from neutral; ups target price by 34%

Street upbeat on Kotak Mahindra Bank's Q4 performance

Kotak Mahindra Bank consolidated net profit rose 16.8 percent year-on-year (YoY) to Rs 5,337 crore in Q4FY24, while net interest income (NII) grew 13 percent YoY to Rs 6,909 crore.

Following the strong metrics, JP Morgan analysts upgraded Kotak Mahindra's rating to 'overweight' and shared a target of Rs 2,070 per share. "The upgrade follows supportive valuations following recent RBI actions and senior management departure. The bank has exhibited strong operating metrics in Q4 and we believe that they can continue to compound the balance sheet at 16 percent CAGR over the next 2 years," they wrote in a post-result review.

Nomura, too, upgraded Kotak Mahindra Bank to 'buy' and set a target price of Rs 2,000 per share following its all-round Q4 performance. "We see significant value in the company. As the RBI's embargo is just 2 percent of FY25 PBT impact, the resolution of the same and any further churn in top management will be key monitorables," they added.

The bank reported strong loan growth of Rs 3.9 lakh crore as of March 31, 2024, whereas average term deposits grew to Rs 2.2 lakh crore. Asset-qualitywise, the gross NPA ratio declined to 1.39 percent in the March quarter from 1.78 percent a year ago. Additionally, the net NPA ratio slipped to 0.34 percent from 0.37 percent.

ALSO READ: Kotak Mahindra Bank expects cost of funds to stabilise despite margin squeeze in Q4

Cost of funds to stabilise despite margin squeeze in Q4

Having said that, margin pressure continued for the private lender during the quarter. Kotak Mahindra Bank saw a contraction of 47 basis points (bps) in its net interest margin (NIM), which declined to 5.28 percent in Q4FY24 from 5.75 percent a year earlier.

However, the management indicated that it expects the cost of funds to stabilise gradually. "We anticipate a continued rise in the cost of funds in the forthcoming quarters, albeit at a slower pace compared to recent periods. The stabilisation of the cost of funds hinges on external rate movements," the bank added.

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