Kotak Mahindra Bank shares crash 12% after RBI crackdown. Derating ahead?

Brokerages have started reducing their target prices on the stock saying that given the bank's high reliance on online channels for new retail customer acquisition, the RBI action may severely hinder its ability to cross-sell products.

Global brokerage Jefferies, which has a 'hold' rating on Kotak, lowered its target price to Rs 1,970 from Rs 2,050 while also reduced its target from Rs 1,950 to Rs 1,750.

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Macquarie, which has chosen not to tweak its targets, admitted that the regulator's action is a "significant setback".

CLSA analysts argue that the impact of the RBI ban will be modest unless the restrictions stay for long. While noting that credit cards are a fast-growing segment but contribute only 4% to the total loan book of the bank, CLSA said it is a higher-ROA business and profit contribution would be in high-single digits.

CITI has a neutral rating on Kotak with a target price of Rs 2,040.

"The restrictions will be reviewed upon completion of external audit and corrective action plan to RBI’s satisfaction which typically takes 6-12 months. We believe such restrictions should impact business growth, including KMB’s already dwindling CASA ratio (down 13% from its peak to ~48%) and its new card acquisition (CIF growth @21% YoY/spends@34% YoY); 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," Emkay Global said.

Kotak has lower branch network compared to other larger private banking peers and therefore, the ban is seen as structurally proving counter-negative for its overall operations.

"With unsecured lending, especially credit cards, becoming key focus areas of most banks, will lose the opportunity to add the high-yield and growing product to its overall mix. It is interesting to note that the recent actions by the RBI have come after the onboarding of new CEOs to banks ( and earlier)," said Shreyansh Shah, Research Analyst, StoxBox.

He said 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. The market valuation of Kotak Bank fell below that of Axis Bank's Rs 3.4 lakh crore during the day.

The RBI had taken a similar punitive action on HDFC Bank in December 2020 restricting India's largest private sector lender from issuing new credit cards and introducing new digital products after multiple glitches linked to digital banking, cards and payments on the bank’s platform were reported in the past two years.

As a result, HDFC Bank stock was derated by brokerages and now investors fear that Kotak's fate could also be similar.

StoxBox has advised 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 1,600 levels on a weekly closing basis," the brokerage said.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)