Rs 44,000 Crore M-Cap Lost, Stock Falls 10%, No More 4th Largest Bank; How RBI's Ban Rocked Kotak

The banking sector is in shock after RBI banned Uday Kotak-backed leading private sector lender, Kotak Mahindra Bank. The after effect of RBI's decision was felt intensely in Kotak Bank's share price as it nosedives sharply by 10% on Thursday. Kotak is under radar, and RBI has banned the private lender from onboarding new customers via online and mobile banking channels.

Kotak Bank Share Price:

At the time of writing, Kotak Bank's share price traded at Rs 1661.30 apiece, nosediving by a whopping 10% with a market cap of Rs 3,30,193.66 crore on Thursday. Since the market opened, Kotak Bank's shares tumbled by at least 12% with an intraday low of Rs 1620 apiece.

But so far, in the trading session, Kotak has lost about Rs 43,966.05 crore market value, tumbling to the day's low of Rs 3,22,417.71 crore, compared to the previous day's market cap of Rs 3,66,383.76 crore.

This led to Axis Bank outrunning Kotak Bank into becoming fourth largest private bank with market cap of Rs 3.41 lakh crore as of now on Thursday, compared to the market cap of Rs 3,28,365.61 crore of the previous day. While Kotak Bank shares are falling, Axis Bank stock skyrockets to nearly 4%.

RBI's Ban:

With immediate effect from April 24, RBI has banned Korak from from onboarding new customers via its online and mobile banking channels. However, the central bank allowed Kotak Bank to continue in providing services to its existing customers, including its credit card customers.

Explaining in details, RBI said, these actions are necessitated based on significant concerns arising out of Reserve Bank's IT Examination of the bank for the years 2022 and 2023 and the continued failure on the part of the bank to address these concerns in a comprehensive and timely manner. Serious deficiencies and non-compliances were observed in the areas of IT inventory management, patch and change management, user access management, vendor risk management, data security and data leak prevention strategy, business continuity and disaster recovery rigour and drill, etc.

Kotak Bank Replies!

To the RBI's latest action, in its regulatory filing, Kotak said, 'RBI directing the Bank to cease and desist, with immediate effect from (i) onboarding new customers through the Bank's online and mobile banking channels and (ii) issuing fresh credit cards. The order was based, inter alia, on the deficiencies observed by the RBI in their IT Examination of the Bank."

Kotak further added, these directions shall be reviewed by RBI upon satisfactory remediation of the observations.

Also, Kotak said, "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. The Bank's branches will continue to onboard new customers, providing them with all the Bank's services, except issuance of new credit cards.

"The Bank believes that these directions will not materially impact its overall business, Kotak added.

Should You Buy Kotak Bank Share Price?

In its latest research note, Motilal Oswal said, "We note that KMB has been aggressively growing its credit card business over the past few years, while the bank has also amassed significant number of customers on the back of its 811 digital strategy. KMB has a credit card market share of 5.8% (no. of cards) and spending market
share of ~4%."

Data from Motilal Oswal revealed that about 99% of new credit cards sold and 95% of new PLs sold by volume were done digitally. As a result, the share of unsecured loans increased to 11.6% in 3QFY24. Management had previously guided increasing the mix of unsecured loans to mid-teens over the current fiscal.

On Kotak's valuation, Motilal added, "99% of new credit cards sold and 95% of new PLs sold by volume were done digitally. As a result, the share of unsecured loans increased to 11.6% in 3QFY24. Management had previously guided increasing the mix of unsecured loans to mid-teens over the current fiscal."

Lastly, Motilal added, "The RBI ban will thus disturb the growth trajectory of retail products and adversely impact overall margins and profitability. Besides, the IT deficiencies that have continued over the past couple of years, as mentioned by the regulator, do pose a concern, as KMB has been one of the most revered banks when it comes to risk management and overall governance practices. We reiterate our Neutral rating on the stock with a revised TP of INR1,900."

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.