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Synopsis : RBI bans Kotak on digital services; Nuvama predicts challenges, advises switching to competitors.
The recent changes are expected to adversely affect Kotak Mahindra Bank's growth and profitability for the next 12–18 months, prompting a sharp reduction in its target multiple from 2.2 times PBV FY26E to 1.7 times. Although the bank's shares have already experienced a significant correction, Nuvama Institutional Equities predicts continued underperformance compared to its peers. They recommend shifting investments to ICICI Bank, Axis Bank, IndusInd Bank, HDFC Bank, and selected NBFCs for a horizon exceeding one year. Additionally, KVS Manian's resignation from the bank's board after 29 years, despite recently being promoted to Joint MD, has led the brokerage to slash its target price. On Thursday, Kotak Mahindra Bank shares dropped by 3.3% to Rs 1,570.10.
Nuvama expressed concern over the departure of a longstanding key management personnel (KMP), especially in the context of multiple KMP exits over the past year and the recent RBI ban on Kotak. With a relatively new CEO and a wave of senior exits within a short timeframe, alongside a higher-than-industry attrition rate and the RBI's digital ban, which underscores deficiencies in digital capabilities, the brokerage downgraded its rating from 'BUY' to 'REDUCE.'
The domestic brokerage foresees adverse effects on growth and profit for the next 12–18 months due to recent changes. As a result, they sharply lowered the target multiple to 1.7 times PBV FY26E from 2.2 times and revised the target price to Rs 1,530, down 27% from the previous Rs 2,095.
"Nuvama noted several senior-level departures at Kotak in the past year, including Uday Kotak and Dipak Gupta due to RBI regulations, the CFO's retirement, the CDO's resignation in November 2023, and Kotak's attrition rate remaining higher than that of its peers," the brokerage added.
The Reserve Bank of India (RBI) recently imposed a ban on Kotak for new digital onboarding and the issuance of fresh credit cards. In a strongly worded communication, the RBI emphasized that the bank's operational resilience is significantly lacking due to its failure to develop IT systems and controls proportionate to its growth.
Nuvama predicts that the combination of senior-level departures and the digital ban will adversely affect Kotak's growth, operational expenses (opex), and profitability over the next 12–18 months. They estimate that every 10 basis points (bps) increase in opex will lead to a 3% decline in profit before tax (PBT). Moreover, they foresee ongoing risks stemming from potential further departures.
"We believe recent negative developments and high attrition create uncertainty regarding Kotak's outlook. According to insights from senior bankers, the ban could set the bank back by one to two years compared to its more aggressive peers. While some banks may have responded to RBI directives in Q4, we believe others, like ICICI, proactively enhanced their liquidity coverage ratio (LCR) and loan-to-deposit ratio (LDR) while scaling back on unsecured loans," Nuvama stated.
Although Kotak Mahindra Bank (KMB) may report earnings in line with its peers in Q4, Nuvama does not view this as a positive catalyst amid the uncertain outlook for the next 12–18 months.
"We have set our valuation multiple at a 10% discount to Axis Bank. With our revised target price of Rs 1,530, we downgrade our recommendation from 'BUY' to 'REDUCE.' Despite the significant correction in the stock price, we anticipate Kotak to underperform its peers in the future. We advise investors to consider transitioning to ICICI, Axis, IIB, HDFC Bank (for a horizon exceeding one year), and select NBFCs including Shriram," the brokerage recommended.
