Kotak Bank shares plunge 10% on RBI curbs; stock ratings, target prices cut

Kotak Mahindra Bank's 90 percent of the new investments and 76 percent of the FDs and RDs were sourced digitally.

Shares of Kotak Mahindra Bank plummeted 10 percent on April 25, a day after the Reserve Bank of India halted the private sector lender from onboarding clients through online channels and issuing credit cards. The central bank’s action may hamper Kotak’s retail business and sentiment around the stock price, according to analysts.

Macquarie views the ban as a significant setback for Kotak Bank, particularly given its reliance on digital channels for customer acquisition.

The bank has seen a substantial number of savings accounts opened through its 811 digital platform, with a majority of unsecured products also processed digitally. The digital segments have shown an impressive growth of 40 percent on-year, outpacing the overall growth rate of 18 percent.

Also Read | RBI cracks down on Kotak Mahindra Bank

Analysts at Citi also believe that the RBI action would adversely impact the bank’s growth, net interest margin (NIM) and fee income. The brokerage has put a ‘neutral’ call on the stock with a target price of Rs 2,040 per share.

While imposing the ban on Kotak, the RBI pointed to material gaps in the lender’s digital and security platforms over the past two years. Following the ban, Jefferies, which has a 'hold' rating on Kotak Mahindra Bank, lowered its target price to Rs 1,970 per share from Rs 2,050 earlier.

The brokerage highlights that the actions taken by the Reserve Bank of India (RBI) will be reassessed following the audit and resolution process.

Emkay Global analysts believe such restrictions should impact the business growth, including Kotak Mahindra Bank’s dwindling CASA ratio (down 13 percent from its peak to around 48 percent) and its new card acquisition.

“This will lead to earnings being hit in the medium term. Additionally, the regulatory overhang would delay any hope of a re-rating after the recent management change,” the brokerage said as it revised its rating for the stock to ‘reduce’ from ‘add’ earlier and cut March 2025 target price to Rs 1,750 per share from Rs 1,950 earlier.

Also Read | RBI action: Kotak Mahindra Bank says taken measures to adopt new tech, assures existing customers

Analysts at Jefferies also drew parallels with HDFC Bank, which faced similar regulatory action from the RBI in 2020, and it took the bank approximately nine to 15 months to resolve the issues. However, if the resolution process for Kotak Mahindra Bank extends beyond six months, it could potentially impact both revenues and costs for the bank, said Jefferies in its note.

According to Macquarie, the ban on digital onboarding is expected to hinder the bank's growth prospects in the medium term. Additionally, Macquarie notes that the bank's reluctance to open new branches, with fewer than 350 branches added in the last four years, poses another challenge.

This combination of factors leads the brokerage to anticipate a de-rating for Kotak Mahindra Bank in the medium term, similar to the experience of HDFC Bank, following the RBI's regulatory action. It has a ‘neutral’ call on the stock with a target price of Rs 1,860 per share.

A banking fund manager, who didn’t want to be named, told Moneycontrol there would be an up to 5 percent correction in the Kotak Bank stock price which is the worst case in the near term. He added that it would take six to nine months to resolve such issues, and it would be difficult to gauge the impact on earnings as the bank may find a way to onboard customers offline if there is a restriction on online mode.

Also Read | RBI curbs on Kotak Mahindra Bank to hurt retail business, stock may fall up to 5%, says expert

CLSA, on the other hand, believes that the impact of this bank on the bank’s profit is likely to be modest unless the ban stays in place for long. The brokerage highlighted that Kotak Mahindra Bank's digital platform '811' has a large customer base, primarily consisting of low-value customers. Hence, the digital platform's contribution to total savings deposits remains relatively low at only 8 percent

While the credit card segment of Kotak Bank is experiencing rapid growth, it only contributes 4 percent to the bank's total loan book. Given its higher return on assets (ROA) business, CLSA expects the profit contribution from these segments to be in the high-single digits in Q4FY24. The brokerage maintained an ‘outperform’ rating on Kotak Bank with a target price of Rs 2,100 per share.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.