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Should you buy Kotak Bank now?


On the evening of Apr 24th, 2024, RBI released a press release stating action against Kotak Bank to cease onboarding of new customers through its online and mobile banking channels and also not to issue any new credit cards.

The next day, the stock was down -11% due to this news. For the market, it came as a surprise but not a huge shocker. It had seen such instances earlier. In Dec 2020, RBI asked HDFC Bank to stop issuing new credit cards. The same was the case with Bajaj Finance in Nov 2023. More on this later.

Coming back to Kotak – this development is bad, but nothing alarming as such for the bank. You see, these actions are taken due to a lapse in areas of IT inventory management, user access management, data security and data leak prevention strategy, disaster recovery etc. And NOT from the asset quality concerns (like we had seen in Dena Bank or LVB) or KYC compliance concerns (Paytm Payments Bank).

In other words, the RBI is saying – Guys, you have to improve your IT infrastructure. We had been saying this for the past two years. Here is a jhalak of not taking them seriously. Fix them and let us know.

Having said that, the bank depends a lot on digital channels for its new business growth. As much as:

  • 72% of new accounts are opened through Kotak 811
  • 76% of FDs & RDs booked on Digital channel
  • 79% of new business loans are sourced digitally
  • 95% of new personal loans (by volume) are issued digitally
  • 99% of all new credit cards

Should you buy Kotak Bank now?

*Source: Kotak Q3FY24 Investors Presentation

Should you buy Kotak Bank now?

*Source: Kotak Bank 2023 AR

Impact on the asset side of things

The credit card segment makes around 3.7% of their overall advances and is growing at 50% YoY. This is the most impacted business segment by this action. Even though the bank will continue to lend to existing customers, there will not be any incremental business in this segment, until RBI’s next plan of action.

The second major segment that will be impacted is the Personal Loans, Business Loans & Consumer Finance, which drives around 60% of their revenue digitally. This segment makes around 5.2% of the overall advances.

We can expect around 9-10% of the overall book will have an impact for the next few quarters.

On the other hand, segments like Home Loans (28% of the book), CV/CE (9%), Agri & Tractor finance (10%), Corporate Banking (23%) will be impacted less by this RBI action.

Basically, anything that involved, retail customer, unsecured and consumer lending may take a major hit. For other segments, the magnitude will be relatively small.

Should you buy Kotak Bank now?

Impact on the Liability Side

The bank is sourcing 76% of FDs & RDs digitally. This will be the major segment that impacts the bank.

Over the last 5 years, the bank had relied majorly on digital banking for deposit growth to such an extent that it had become reluctant to open new physical branches. In March 2020, the bank had 1,600 branches, which increased to 1,869 as of December 2024 (a 3% CAGR), while during the same period, Deposits grew by 9% CAGR. We may see a slowdown in deposit growth going forward for the bank.

Technically, impact on liability side will be less when compared to asset side of things for the bank.

Cost-to-Income may spike above 50%

If the bank wants to maintain deposit growth, it will need to open physical branches, which will increase near-term costs. This, combined with the expected increase in IT infrastructure spending (as directed by the RBI), will cause the cost-to-income ratio to rise to up to 50% from the current level of 48.4%.

Are premium valuations a thing of the past?

The market favors qualitative growth. When a company delivers high growth without compromising on quality for an extended period of time, it eventually becomes a darling of the investors and the market. This is precisely what happened with Kotak Bank for over two decades since the formation of bank in 2003.

Throughout this time, the bank maintained one of the best asset quality levels in the Indian banking industry, even during events like the Asian financial crisis, Global financial crisis, Taper Tantrum, Demonetization, IL&FS, and Covid, to name a few. The market had always given premium valuations for the bank (5Y median Price to Book Value (PBV) at 4.6 times, 10Y median at 4.2). But going forward, it may be tough—at least for the next few quarters.

The company is going through a lot of leadership changes, and now this ban. While it may not fall further, and most of the damage may have already been done, the stock could undergo a long consolidation period going ahead (which, anyway, has been the case in the last 3-4 years). Not expecting any positive surprises in the near term.

Should you buy the stock now?

Not yet.

You see, these things take time. It took 9 months for the RBI to lift a similar ban on HDFC Bank issuing credit cards. Bajaj Finance is still battling the issue from the past 6 months.

So, don’t be in a hurry to jump in and grab the stock. Not to forget, the bank may have to struggle to report the past growth numbers over the next few quarters. Until then, it is better to wait on the sidelines for a better opportunity to emerge as the story unfolds.

At this juncture, it will be better to wait for the results and accompanying commentary, scheduled for May 4th, 2024. That will determine whether it’s a good time to consider this star veteran stock for the long-term.

This is an ongoing story and will keep updating the post with new developments as they occur.

Kotak Bank weekly chart

Should you buy Kotak Bank now?

Disclosure: We do not hold Kotak Bank in Capitalmind Premium portfolios. Please note that this article is intended solely for informational purposes and should not be construed as an investment recommendation.

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