Kotak Bank Share Price Dive 10%: Analysts Cut Ratings and Targets

Kotak Mahindra Bank share price plummeted 10% on April 25 to ₹1,658.75 apiece on the BSE, a day after the Reserve Bank of India (RBI) halted the private sector lender from on-boarding new clients through online channels and issuing fresh credit cards with immediate effect.

The central bank said Kotak Mahindra Bank was found to be non-compliant with the corrective action plans issued by the RBI for 2022-23. “In the absence of a robust IT infrastructure and IT Risk Management framework, the bank’s Core Banking System (CBS) and its online and digital banking channels have suffered frequent and significant outages in the last two years, the recent one being a service disruption on April 15, 2024, resulting in serious customer inconveniences,” the RBI said.

The central bank has barred the private sector lender from new issuances due to deficiencies in the bank’s IT system in 2022 and 2023. The central bank’s action have hampered Kotak’s retail business and sentiment around the stock price, according to analysts. This action would also inhibit growth projections that Kotak Mahindra Bank had set for itself, said analysts. 

Kotak 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% on-year, outpacing the overall growth rate of 18%.

Analysts at Citi 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 ₹2,040 per share. Following the ban, brokerage firm Jefferies, which has a 'hold' rating on Kotak Mahindra Bank, lowered its target price to ₹1,970 per share from ₹2,050 earlier.

Emkay Global analysts believe such restrictions should impact the business growth, including Kotak Mahindra Bank’s dwindling CASA ratio (down 13% from its peak to around 48%) 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 its March 2025 target price to ₹1,750 per share from ₹1,950 earlier.

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.

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 lower-tier customers. Hence, the digital platform's contribution to total savings deposits remains relatively low at only 8%.

While the credit card segment of Kotak Bank is experiencing rapid growth, it only contributes 4% 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 ₹2,100 per share.

Kotak Mahindra Bank believes that these directions will not materially impact its overall business

“The Bank has taken concrete steps to adopt new technologies to strengthen its IT systems and will continue to work with RBI to swiftly resolve balance issues at the earliest. The Bank would like to reassure its existing customers of uninterrupted services, including credit card, mobile and net banking," Kotak Mahindra Bank said in a stock exchange filing.