RBI action on Kotak Bank: Stock plunges 12% as analysts turn bearish

RBI action on Kotak Mahindra Bank: With unsecured lending, especially credit cards, becoming key focus areas of most banks, Kotak Mahindra Bank will lose the opportunity to add the high-yield products

Kotak Bank News: The Reserve Bank of India's (RBI's) action against Kotak Mahindra Bank, directing it to stop onboarding new customers through its online and mobile banking channels will hit the bank's near-term growth, analysts said on Thursday.

The directive, they said, is sentimentally negative for the company in the short to medium term as, considering Kotak Mahindra Bank's high reliance on online channels for new retail customer acquisition, the RBI's action may severely hinder its ability to cross-sell products.

"We believe such restrictions should impact business growth, including Kotak Mahindra Bank's already dwindling current account-savings account (CASA) ratio (down 13 per cent from its peak to 48 per cent) and its new card acquisition (customer identification file (CIF) growth at 21 per cent year-on-year/spends at 34 per cent Y-o-Y). This will lead to earnings being hit in the medium-term. Additionally, the regulatory overhang would delay any hope of a re-rating post the recent Management change," said analysts at Emkay Global Financial Services in a note. 

The brokerage has cut its rating on Kotak Mahindra Bank to 'Reduce' from 'Add', and cut March, 2025 target price to Rs1,750 from Rs1,950 earlier. 

On the bourses, shares of Kotak Mahindra Bank hit the 10 per cent lower circuit in early deals, and, thereafter, extended losses to slump 12 per cent to an intraday low of Rs 1,620 apiece. By comparison, the benchmark S&P BSE Sensex was up 0.33 per cent at 10:24 AM.

On Wednesday, the RBI asked the private-sector lender to stop onboarding new customers through its online and mobile banking channels, and barred it from issuing fresh credit cards.

In a circular, the regulator said the action was necessary as "the bank failed to plug gaps in its information technology (IT) systems". 

"There were frequent outages in the bank's core banking system and online channels in the last two years which inconvenienced the customers," the central bank said. READ MORE

The bank, however, can continue to provide services to existing customers, including credit card customers, the RBI added.

According to Motilal Oswal Financial Services, about 99 per cent of new credit cards sold and 95 per cent of new personal loans sold by volume were done digitally. As a result, the share of unsecured loans increased to 11.6 per cent in Q3FY24.

KMB has a credit card market share of 5.8 per cent (no. of cards) and spending market share of around 4 per cent, it added. 

Credit card portfolio constituted 3.7 per cent of advances, up 52 per cent year-on-year and 10 per cent quarter-on-quarter. 

As per the RBI's circular, serious deficiencies and non-compliances were observed in the areas of IT inventory management, patch and change management, user access management, vendor risk management, data security and data leak prevention strategy, business continuity and disaster recovery rigour and drill, etc.

"The bank is found to be materially deficient in building necessary operational resilience on account of its failure to build IT systems and controls commensurate with its growth," the RBI release said.

What should investors do?

Meanwhile, this is not the first time the RBI has taken a punitive action against a bank for not confirming with regulatory guidelines. Similar actions have been taken against Federal Bank, South Indian Bank, and HDFC Bank in the past. Such restrictions are reviewed upon completion of external audit and corrective action plan to RBI's satisfaction, which typically takes 6-12 months. 

"HDFC Bank faced a similar action from the RBI in 2020, and it took 9-15 months to clear the issues. If the issue at Kotak Mahindra Bank takes more than six months to resolve, its revenues and costs may be affected," said analysts at global brokerage Jefferies. They maintained their 'Hold' rating on the stock, for now, with a price target of Rs 1,970.

On its part, Kotak Mahindra Bank said that the bank has taken measures for adoption of new technologies to strengthen its IT systems and "will continue to work with RBI to swiftly resolve balance issues at the earliest".

Shreyansh Shah, research analyst at StoxBox, however, believes that given the bank's lower branch network compared to other larger private banking peers, it would structurally prove counter-negative for its overall operations. 

"With unsecured lending, especially credit cards, becoming key focus areas of most banks, Kotak Mahindra Bank will lose the opportunity to add the high-yield and growing product to its overall mix. We believe that the valuation premia of Kotak Mahindra Bank, owing to its strong governance practices, may take a hit going forward which has already deteriorated following Uday Kotak's exit earlier," he said. 

Shah advises investors to be cautious in the short-term and wait for the dust to settle before making new positions. "For existing investors, we would advise to hold positions with key support levels placed around Rs 1,600 levels on a weekly closing basis," he added.

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(Disclaimer: Entities controlled by the Kotak family have a significant holding in Business Standard Pvt Ltd)