(Bloomberg) -- Shares of Kotak Mahindra Bank Ltd. fell after the lender said it’s still working to lift a regulatory ban on expanding its business via online platforms, and reported profits that were boosted by gains from a unit stake sale.
Kotak shares fell as much as 3.6% on Monday, the most in nearly three weeks, before it recovered some losses. Analysts pointed to a surprise contraction in the first-quarter net interest margin that disappointed investors on the back of the ban.
In April, Kotak was prohibited from adding customers through its digital channels and from issuing new credit cards, after RBI found deficiencies and non-compliance in various processes at the lender. A week into the ban K.V.S. Manian, once touted as a potential future chief executive, resigned from the bank.
The bank has appointed Grant Thornton Bharat as its auditor in consultation with the regulator Reserve Bank of India, Chief Executive Officer Ashok Vaswani told reporters in a call Saturday. “We are pushing hard and have shared some timelines with RBI,” he said, without specifying when the process could result in lifting of the recent RBI ban.
“We have made significant progress during the quarter,” Vaswani said of the bank’s technology platform. “We have beefed up the internal team with resources from Accenture, Infosys, Oracle and Cisco and focused on relentless execution.”
RBI’s Restrictions
Vaswani had said in May that the company would focus on cross-selling its products to existing customers and double down on its technology build-out in an effort to mitigate the effects of the ban. Still, analysts expected a slowdown. Nuvama Institutional Equities downgraded Kotak to “reduce” from “buy” on the back of high attrition rates and the RBI move.
The lender’s net income rose 81% to 62.5 billion rupees ($747 million) in the quarter ended June 30, compared with the same period last year, according to a filing Saturday. This however included a one-time gain of 35.2 billion rupees from selling its stake in Kotak Mahindra General Insurance to Zurich Insurance Group AG, without which earnings would have missed the average profit estimate of 37.6 billion rupees based on a Bloomberg survey of analysts.
The bank’s customer base expanded marginally to 51 million from 50 million in the prior quarter. Deposits fell by 0.4% quarter-on-quarter to 4.47 trillion rupees. Loans rose 3.6% to 4.06 trillion rupees, beating analyst estimates.
The bank added 600,000 customers post the ban in April and overall, it added 1 million customers in the quarter, according to Devang Gheewalla, Kotak’s chief financial officer.
“Customers are loving investments in mutual funds”, and securities which had led to strong growth in the bank’s asset management company and securities businesses, Vaswani said. The ban on credit cards had impacted the growth of the bank’s unsecured loans, according to Shanti Ekambaram, joint managing director.
This month, the bank was again in focus when Hindenburg Research revealed that one of the bank’s funds was the vehicle through which a US-based hedge fund, in partnership with Hindenburg, shorted the shares of billionaire Gautam Adani’s Adani Enterprises Ltd. last year.
Hindenburg also revealed that the bank had been issued a show-cause notice by the Securities and Exchange Board of India. Kotak has been asked to assist regulators as part of their probe into the short seller attack on Adani. There is no implication of wrongdoing on the part of the bank.
--With assistance from Chiranjivi Chakraborty and Alex Gabriel Simon.
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