Why Kotak Mahindra Bank Share Price is Falling

Share price of Kotak Mahindra Bank is on a shaky ground these days.

It all started last week when India's central bank penalised the lender for an IT procedural lapse and lack of adherence to guidelines for its technology infrastructure.

Today, the lender faced another major blow which sent its stock tumbling over 4%.

Why Kotak Bank Share Price is Falling

#1 RBI Action

As we mentioned above, the primary reason why Kotak bank shares are under pressure for the past two weeks is because the RBI has penalized the bank.

Last week, the Reserve Bank of India (RBI) directed Kotak Mahindra Bank to cease and desist, with immediate effect, from onboarding of new customers through its online and mobile banking channels and issuing fresh credit cards.

The bank is allowed to continue to provide services to its existing customers, including its credit card customers.

The RBI added that in the past two years it had been in continuous high-level engagement with the bank on all these concerns with a view to strengthening its IT resilience, but the outcomes had been far from satisfactory.

Therefore, the RBI decided to place certain business restrictions on Kotak Bank in the interest of customers and to prevent any possible prolonged outage which might seriously impact not only the bank's ability to render efficient customer service but also the financial ecosystem of digital banking and payment systems.

#2 Big Resignation followed by Rating Downgrade

The other reason why shares are under pressure is because the lender recently saw a top-level exit, just a week after the RBI restrictions.

On Tuesday this week, KVS Manian resigned from his position as joint managing director with immediate effect.

Reports were earlier circulated saying he'll be moving to Federal Bank as the current CEO and MD's role ends in September this year.

Following this news, a global brokerage downgraded the stock saying senior level exits can affect the bank's growth and valuations.

The brokerage said that many senior exits have bunched up over six months and the recent changes shall hurt the lender's growth and profit over the next 12-18 months.

This sent the stock falling around 4% in intraday trade today.

What Next?

We reached out to Co-head of Research at Equitymaster Tanushree Banerjee, for her view on the regulatory embargo on Kotak Bank.

Tanushree has been tracking the markets for almost two decades, especially the banking sector and RBI policies. So we were eager to see what she had to say.

Here's Tanushree -

• HDFC Bank faced similar technology related issues and was penalised by RBI in 2023. There were also embargos on incremental client additions.
  
  However, since then, the bank has invested in making its tech backbone more robust and complied with all regulatory requirements. I see Kotak Bank doing the same.
  
  Both HDFC Bank and Kotak Bank need to invest in their tech infrastructure to avoid technology glitches and build capacity to accommodate growth in the coming decade. Else they will have to sacrifice growth opportunities from time to time.

In the near term, Kotak Bank shares may show extreme volatility as near-term hiccups remain in the credit card business, which may keep its shares at bay.

Also, investors have been pessimistic anticipating a rate cut. When the RBI cuts the repo rate, it typically aims to stimulate economic activity by reducing the cost of borrowing for businesses and individuals.

Now, when the RBI cuts the repo rate, commercial banks often pass on this reduction to their customers by lowering the interest rates on loans, such as home loans and car loans.

However, banks may not lower deposit rates as quickly or to the same extent, as they want to maintain competitiveness in attracting deposits.

As a result, when loan interest rates decrease more than deposit interest rates, the NIM of banks tends to compress.

This is because the spread between the interest earned on loans and the interest paid on deposits narrows. When the NIM decreases, banks may experience a reduction in profitability.

This is another reason why Kotak Bank shares have been experiencing a downtrend since January 2024.

Nevertheless, the bank has maintained its NIMs in the range of 4.3-4.6% over the last 10 years. NIM was higher at 5.3% in FY23 driven by driven by our risk adjusted pricing on loans.

Kotak Mahindra Bank continues to guide for steady growth trend and aims to improve the mix of unsecured loans, expressing confidence in the quality of the underlying portfolio.

The lender boasts a well-capitalised balance sheet with a healthy capital adequacy ratio.

How Kotak Mahindra Bank Share Price has Performed Recently

In the past 5 days, the stock is down around 6%. In a month, Kotak Bank shares have fallen almost 12%.

Kotak Mahindra Bank has a 52-week high of Rs 2,063 touched on 31 May 2023 and a 52-week low of Rs 1,552 touched today.

In 2024 so far, Kotak Bank shares have fallen 19%.

Here's a table comparing Kotak Bank with its peers -

Comparative Analysis

Company	Kotak Bank	Axis Bank	HDFC Bank	IndusInd Bank	ICICI Bank
ROE (%)	14.2	8.8	17.2	14.5	17.7
ROCE (%)	13.9	9.3	15.3	13.1	15.3
Latest EPS (Rs)	87.7	85.5	84.3	115.3	60.4
TTM PE (x)	18.5	13.6	17.9	12.5	18.3
TTM Price to book (x)	2.6	2.3	2.5	1.8	3.3
Dividend yield (%)	0.1	0.1	1.3	1.1	0.9
Industry PE	16.7
Industry PB	2.5

Data Source: Ace Equity

About Kotak Mahindra Bank

Kotak Mahindra Bank is among the leading private sector banks in India with a total loan book of more than Rs 4 trillion.

It enjoys a strong urban franchise in India with an extensive distribution network of more than 1,750 branches and 2,800 ATMs.

The lender enjoys a strong presence in the retail segment and is investing significantly in digital platforms.

Moreover, through its subsidiaries, it has also built a presence in businesses like auto loans, broking, life insurance and asset management.

To know more about the bank, check out its financial factsheet and latest financial results.

Happy Investing!

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