BENGALURU (Reuters) -Kotak Mahindra Bank’s shares tumbled 13% on Thursday after India’s central bank banned the private lender from taking on new clients digitally, raising concerns about the potential impact on the lender that relies heavily on online banking.
The share drop was the lender’s biggest intraday slide since the onset of COVID-19 pandemic restrictions in March 2020. The stock was also the biggest drag on the benchmark Nifty 50 index, which was flat.
The Reserve Bank of India (RBI) on Wednesday barred Kotak, India’s fourth-largest lender by market value, from taking on new customers via its online and mobile banking channels, and from issuing new credit cards, due to IT-related deficiencies.
That was a “negative surprise” and is bound to affect Kotak’s growth over the medium term as the lender had a very heavy digital model, said Macquarie Capital analyst Suresh Ganapathy.
About 95% of Kotak’s new personal loans sold by volume were disbursed digitally in the October-December quarter, while it sold 99% of new credit cards through digital channels.
Kotak said it has taken measures to adopt new technology to strengthen its IT systems and that it believes the ban will not materially impact its overall business.
However, at least three brokerages cut their price targets on the lender’s stock, including Jefferies.
The brokerage also trimmed its earnings expectations for Kotak by 1%-2% for the current fiscal year to factor in the potential risks and lower valuations, saying a moderation in the credit cards business can impact revenue and costs.
The RBI has taken similar action against non-compliant entities previously.
In December 2020, it barred HDFC Bank, India’s largest private lender, from recruiting new credit card customers or launching digital products after its digital payment services were hit by a power failure. It took over a year for both the bans to be removed.
The duration of the ban on Kotak remains a key monitorable as the RBI’s review and an external audit could take time, Macquarie’s Ganapathy added.
Kotak’s stock trades at about 20 times its expected earnings over the next 12 months, a PE ratio that makes it the second-most valuable stock on the 12-member Nifty bank index, per LSEG data.
The slide in Kotak’s shares on the day took their losses for the year to a little over 12%, much steeper than the 0.3% dip in the bank index.
(Reporting by Sethuraman NR in Bengaluru; Editing by Varun H K and Savio D’Souza)
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