In The Red: Kotak Mahindra shares continue to trade low after RBI ban

Kotak Bank shares: Kotak Mahindra Bank's shares sustained their downward trajectory on Friday, following a steep 13 per cent decline on Thursday triggered by the Reserve Bank of India's (RBI) prohibition on the bank's digital client addition. The continued slump in the bank's stock has sparked concerns about the potential repercussions for the institution, particularly given its heavy reliance on online banking services.

Kotak Mahindra Bank shares were trading 0.37 per cent lower at Rs 1,636.35 apiece on the National Stock Exchange as of 10:20 am.

Thursday's plunge marked the most significant intraday drop for Kotak Mahindra Bank's shares since March 2020, amidst the onset of COVID-19 pandemic restrictions. Moreover, the stock's decline remained a significant drag on the benchmark Nifty 50 index, which maintained relative stability amid the market turbulence.

In its announcement on Wednesday, the RBI directed Kotak Mahindra Bank, India's fourth-largest lender by market value, to halt the acquisition of new customers through its online and mobile banking platforms, along with the suspension of issuing new credit cards. The regulatory action was prompted by IT-related deficiencies identified within the bank's operations.

Suresh Ganapathy, an analyst at Macquarie Capital, described the RBI's decision as a "negative surprise," anticipating potential impacts on Kotak's growth trajectory in the medium term, given its substantial reliance on digital infrastructure. Notably, a significant portion of the bank's new personal loans and credit card disbursements were facilitated through digital channels, accounting for 95 per cent and 99 per cent, respectively, in the October-December quarter.

In response to the regulatory intervention, Kotak Mahindra Bank reiterated its commitment to strengthening its IT systems with advanced technology, expressing confidence that the ban would not severely disrupt its overall business operations. However, several brokerages, including Jefferies, opted to reduce their price targets on the bank's stock, citing potential risks and adjusted earnings projections in light of the evolving scenario.

The RBI's action against Kotak Mahindra Bank mirrors its previous interventions involving non-compliant entities. For instance, in December 2020, India's largest private lender, HDFC Bank, faced similar restrictions on new credit card recruitment and digital product launches following disruptions in its digital payment services due to a power outage.

The duration of the ban imposed on Kotak Mahindra Bank remains a critical aspect to monitor, as both the RBI's review process and an external audit could potentially prolong the embargo, highlighted Macquarie's Ganapathy.

Kotak Mahindra Bank's stock currently trades at approximately 20 times its projected earnings over the next 12 months, positioning it as the second-most valuable stock within the 12-member Nifty bank index, according to LSEG data. The sustained downturn extended the bank's losses for the year to over 12 per cent, significantly surpassing the marginal 0.3 per cent decline observed in the broader bank index.