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Kotak Mahindra Bank Ltd’s shares have lagged broader markets. In the past one year, the stock has declined by 15%, while the Nifty Bank index has dropped 1%. Analysts reckon the valuations of the stock were pricey to start with. Second, the impending management change is said to be an overhang for the stock.

“The change in management will be a significant catalyst, as we believe the Street places a significant premium on Uday Kotak being at the helm, as he has steered the group since the bank’s inception and drives the core narrative," said analysts from Nomura Financial Advisory and Securities (India). Uday Kotak’s term as managing director and chief executive officer ends in December 2023.

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What’s worrying Kotak Mahindra Bank investors

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The bank’s September quarter (Q2FY23) results announced recently do little to boost investor sentiment even as net interest margin (NIM) rose by 25 basis points (bps) sequentially to 5.17%, a multi-quarter high. In its earnings call, the management said the expansion in NIM was largely because of repo rate hikes, loan book mix of fixed and floating rate book, and growth in the unsecured book.

The bank’s loan book grew 5% sequentially and 69% of the loans were on floating rates. High-yielding unsecured retail advances (including retail microfinance) rose to 8.7% of advances versus 7.9% in Q1. Here, the management believes that they have reasonable room for growth and targets to reach mid-teens.

On the flipside, overall deposits grew 3% sequentially. The current accounts and savings accounts ratio was muted at 56% versus 58% in Q1. “There are concerns on deposit traction as Kotak is operating at 90% loan-to-deposit ratio. Loan growth at 25% y-o-y is not sustainable. We expect it to drop to below 20%." said Krishnan ASV, institutional research analyst, BFSI, HDFC Securities. “To fix the deposit momentum, we believe the bank has to raise pricing of their savings accounts deposits, implying higher cost of funds," he said.

Investors should track branch expansion. The management said branches would be steadily added but the density requirement would be less now. There is comfort on asset quality. In Q2, gross non-performing assets (NPA) and net NPA ratios fell by 16bps and 7bps, sequentially, to 2.08% and 0.55%, respectively, aided by strong recoveries and upgrades.

“We believe that Kotak continues to be a fantastic franchise but it is in an investment phase and with the current scramble for deposits, it might have to work harder than larger banks like ICICI Bank and HDFC Bank," contended Krishnan.

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