Kotak Mahindra Bank: New external CEO, likely acquisition are overhangs, say analysts

Kotak Mahindra Bank Ltd reported an in-line September quarter results, with a 24 per cent growth in profit on a 23.5 per cent rise in net interest income. Analysts said a soft net interest magtin (NIM) was already in the price but the appointment of a new external MD & CEO Ashok Vaswani and a likely acquisition of IDBI Bank could serve as overhangs in the near term.

In the case of Vaswani's appointment, the Street was earlier expecting the two contenders for the bank's CEO post were Kotak Mahindra Bank's existing Executive Directors. "So far, Kotak has been run largely by a core team headed by a promoter-CEO that has not changed since inception. While the new CEO brings with him rich experience in digital and consumer banking, going by the experiences at other banks, we believe it would take the new CEO at least 18–24 months to implement his perspectives. So his appointment would likely be a near-term overhang on the stock," Nuvama said in a note.

Shares of Kotak Mahindra Bank underperformed Nifty Bank by 4 per cent year-to-date. Nuvama sees the likely acquisition of IDBI Bank, which Kotak has not denied, as an overhang, given the vast difference between private and PSU cultures.

Motilal Oswal Securities said Kotak Mahindra Bank delivered a mixed quarter, with a beat in earnings and a 35 bps sequential contraction in NIM. The earnings, the domestic brokerage said, was driven by higher other income and controlled opex. Asset quality improved slightly, aided by healthy recoveries, even as slippages increased sequentially.

"The bank continues to guide for steady trends in retail delinquencies and aims to further increase the mix of unsecured loans to mid-teens from 11 per cent currently. While we remain constructive on the bank’s business growth outlook and its ability to deliver superior RoA, we believe that execution under the new CEO will remain a key monitorable to assess the stock’s performance over the near term. We increase our FY24/FY25 PAT estimates by 5 per cent/7 per cent, reflecting strong other income and controlled opex," it said.

Motilal Oswal maintained its 'Neutral' call on the stock with a target of Rs 1,900.

Kotak Mahindra Bank shares have fallen off late due to concerns around the change in the top management and the exit of Kotak, who has been synonymous with the bank and the driving force of its strategy and competitive positioning since inception. "Given the sharp correction in stock price, we believe the downside is rather limited. That said, upside triggers are not visible either," Nuvama said.

Nirmal Bang is hopeful, It said While the appointment of Ashok Vaswani as new MD & CEO of the bank brings in clarity with respect to leadership, smooth management transition will be key.

"With his vast expertise in building corporate and consumer lending businesses at a global scale, Vaswani’s leadership is expected to accelerate digital and tech initiatives at Kotak Bank, it said.

After adding subsidiary valuation of Rs 381 per share, Nirmal Bang arrived at a target price of Rs 2,182 on the stock against Rs 2,371 earlier, valuing the bank at 3.1 times FY25 ABV.

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