Why Kotak Mahindra Bank Share Price is Falling

Dark clouds hovered around Kotak Bank ever since 25 April 2024. On that day, the RBI imposed a temporary pause on onboarding new customers through online and mobile banking channels and halted the issuance of fresh credit cards.

The RBI's action followed the discovery of serious issues in multiple areas, including IT management, vendor risk management, data security, and disaster recovery strategies.

These deficiencies raised concerns about the bank's operational resilience and risk management practices.

Since the restrictions, the bank has struggled to shake off the negative sentiment. Just as the impact of these troubles began to ease, fresh challenges emerged.

On 19 October 2024, the bank announced its quarterly results, which triggered a further decline in its share price. Over the past five days, Kotak Bank's stock has slipped 6.3%.

Let's take a look at the quarterly results to understand why Kotak Bank's share price is falling.

Disappointing Quarterly Results

Kotak Bank reported a lower than expected 5% rise in profit for Q2 FY25. During the quarter under consideration its net profit stood at Rs 33.4 billion (bn). The profit was impacted by higher loan provisions and shrinking lending margins.

Provisions and contingencies, meant to cover potential bad loans, increased by nearly 80% to Rs 6.6 bn during the quarter.

Net interest income (NII) met expectations at Rs 70.2 bn, showing an 11.5% year-over-year increase.

However, the net interest margin (NIM) dropped to 4.9%, down by 11 basis points from the previous quarter. This decline was due to a lower share of higher-yield unsecured loans, the continued impact of regulatory restrictions, and a rise in loan slippages.

Asset quality also deteriorated. The gross non-performing assets (GNPA) ratio rose by 10 basis points to 1.5%, while the net non-performing assets (NNPA) ratio increased by 8 basis points to 0.4%.

Loan slippages for the quarter reached Rs 18.7 bn, reflecting a ratio of 1.92% compared to 1.44% in Q1.

The bank's share price started falling after the quarterly results were announced on 19 October 2024. Investors reacted negatively to the weaker margins, higher provisions, and rising non-performing loans.

On 19 October along with declaring quarterly results the company also acquired a loan book from Standard Chartered Bank.

Let's dig into the details of the transaction to understand how it impacts Kotak Bank.

Loan Acquisition from Standard Chartered Bank

Kotak Mahindra Bank announced that it would acquire Standard Chartered Bank India's personal loan book. The outstanding loan portfolio was valued at around Rs 41 bn as of 30 September 2024.

The loans involved in the deal are classified as standard loans under the Reserve Bank of India's guidelines. Kotak Mahindra Bank clarified that the final loan amount will reflect the outstanding balance closer to the completion date.

The acquisition is expected to be finalised in over three months, subject to regulatory approvals and other closing conditions.

Kotak Mahindra Bank stated that the transaction aligns with its strategy to grow its retail assets. The bank also highlighted the opportunity to tap into a high-quality customer base and assured a smooth transition, leveraging its strong track record in integrating new businesses.

What Next?

Kotak Mahindra Bank is currently dealing with various challenges that are affecting its share price.

The bank aims to recover from these difficulties by focusing on its rural and secured businesses. It expects that these sectors will help mitigate the overall impact of recent setbacks.

The bank is actively working to navigate the limitations imposed by the RBI. It believes that a potential lifting of these restrictions could enhance its operating performance.

To protect its net interest margin (NIM), Kotak Mahindra Bank recently reduced its savings account rate by 50 basis points.

Additionally, the new loan portfolio acquisition from Standard Chartered Bank represents about 1% of its total portfolio. It's anticipated to slightly improve NIMs and provide opportunities for cross-selling products.

Despite these proactive measures, there are concerns regarding margin risk. A substantial portion of the bank's loan book is linked to the repo rate, which raises exposure to margin fluctuations when the rate-cut cycle begins.

The RBI's sanctions on credit card issuance and restrictions on new customer onboarding through digital channels have negatively affected the growth of high-yield unsecured assets.

This pressure on NIM is likely to persist, influenced by moderate growth in the unsecured segment and the implications of deposit re-pricing.

To adapt to these challenges, Kotak Mahindra Bank has made notable progress in core banking resilience and has enhanced its cybersecurity and digital payment frameworks.

The bank is engaged with an external auditor to validate actions taken to address the RBI's concerns. Regular updates are being provided to the regulator to demonstrate the progress made.

In terms of technology initiatives, the bank is focusing on improving its mobile banking applications and automating front-line processes. This approach aims to enhance customer journey automation and deepen existing customer relationships.

Overall, while Kotak Mahindra Bank faces significant challenges, its strategies for recovery and growth may help stabilise its performance.

How Kotak Bank Share Price has Performed Recently

In the past five days, Kotak Bank share price has tumbled 6.6%. In the last month, it has slipped 7.9%.

The stock price has tumbled 6.6% in the 2024. Additionally, it is up 2.4% in the last year.

The stock touched its 52-week high of Rs 1,953 on 23 September 2024 and a 52-week low of Rs 1,554.2 on 3 May 2024.

About Kotak 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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