The appointment of Ashok Vaswani as the new managing director and chief executive officer (MD and CEO) of Kotak Mahindra Bank Ltd should have ideally come as a sigh of relief for investors. After all, it clears the uncertainty on management succession—a factor has been a lingering concern for the stock. Note that Uday Kotak’s exit as the bank’s MD and CEO in September ahead of his scheduled retirement had made investors edgy. But the Street does not seem as excited by the latest development. The stock fell 1.6% on Monday, a day when the sectoral index Nifty Bank was down 1.3%.
The selection of an external candidate was contrary to the wide-held expectation of an internal candidate taking over. As analysts from Nuvama Research said, “So far, Kotak has been run largely by a core team headed by a promoter-CEO that has not changed since inception.”
To be sure, Vaswani brings with him rich experience of building consumer and corporate books on a global scale. His track record is a good three and a half decades, initially at Citigroup and more recently, at Barclays. Since one of Kotak’s long-term goals is to increase thrust on digital retail banking, Vaswani’s technology-related experience could well be helpful.
That said, a smooth transition is crucial. A worry here is that the cultural integration could take longer. “While the new CEO brings with him rich experience in digital and consumer banking, going by the experiences (of external appointments) at other banks, we believe it would take the new CEO at least 18–24 months to implement his perspectives,” said Nuvama.
Also, top-level changes usually tend to increase attrition. The exit of key personnel from the senior management team could dampen investors’ sentiment. Vaswani will take charge on or before 1 January for three years.
The news of the appointment has overshadowed the bank’s September quarter (Q2FY24) earnings that were also announced on Saturday. In any case, earnings were a mixed bag. Sharp net interest margin (NIM) contraction of 35 basis points (bps) sequentially to 5.22% was discouraging. In an earnings call, the management said that around 15 bps points of margin drop was due to one-off factors. The pace of margin fall should moderate ahead. The bank has retained its FY24 NIM guidance of minimum 5%. However, costs of funds are inching up, and require close tracking. The loan book grew 18% year-on-year and 6% sequentially, led by healthy traction across segments. It is worth noting here that the share of unsecured loans in total advances rose to 11% in Q2FY24 and the management expects it to rise to mid-teens by FY24-end. This is in line with the bank’s strategy to improve the share of high-yield products in its portfolio. But caution is warranted here. The Reserve Bank of India’s recent rebuke on unsecured loans could slightly weigh on Kotak Mahindra Bank’s growth/margin, said a Emkay Global Financial Services report. Deposit growth lagged loan growth sequentially in Q2, rising nearly 4%, and the changing deposit mix needs to be tracked.
Also, the bank’s covid provision buffer stands low at 0.2% of loans versus 0.6-1.2% for peers and thus calls for higher provisions, according to Emkay. These variables may play spoilsport for the bank’s return ratios profile. Also, a potential acquisition of IDBI Bank may bring new concerns depending upon the deal contours.
Meanwhile, so far in 2023, the Kotak Mahindra Bank stock has lagged the sector index Nifty Bank, falling almost 5%. In the near term, investors will stay glued to the CEO transition and any potential changes in the bank’s growth strategy.
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Updated: 23 Oct 2023, 10:55 PM IST