Kotak Mahindra Bank raises Rs 7,442 crore, shares jump 3%, but this brokerage firm isn’t impressed

Uday Kotak led-Kotak Mahindra bank successfully raised Rs 7,442 crore by issuing 65 million shares of the lender at a discounted price of Rs 1,145 per share via a Qualified Institutional Placement (QIP). Shares of the private lender went up by 4% during the early hours of trade, in line with the equity markets that were overtly joyus on Monday. However, the banks capital raising plans, which also help the promoters bring the shareholding down, is going to affect the Return On Equity (RoE), according to brokerage and research firm Emkay Global. The already subdued RoE, will see further reduction after the bank’s QIP, said Emkay in a research note.

Kotak Mahindra Bank’s QIP saw marquee investors such as Invesco Oppenheimer invest to pick up 52 lakh shares, followed by Canada Pension Plan Investment Board, buying 46 lakh shares, and ICICI Prudential Mutual Fund getting hands-on close to 41 lakh shares. “The capital raise will further reduce the bank’s already depressed RoEs (due to the impact of Covid-19) to ~11% (standalone) over FY21/FY22E from 13% in FY20, before improving to 12% in FY23E as growth accelerates,” Emkay Global said. The brokerage firm cut its target price from Rs 1,290 earlier to Rs 1,285 per share with a Hold Rating on the scip.

Priced at Rs 1,249 per share, Kotak Mahindra Bank is the costliest bank stock among the Bank Nifty constituents. RoE is the profitability indicator for shareholders, helping them assess how much profit is generated on every penny invested by them in the stock. RoE is often used by investors to ascertain how the company’s management is effectively using assets to generate profits. Brokerage firm Motilal Oswal has a neutral view on the stock with a target price of Rs 1,350, however, RoE estimates have been pegged at 11.4%

Despite that, Kotak Mahindra Bank is a safe harbor in the current risk-off environment, according to Emkay Global. The report adds that the lender has a strong liability/capital buffer, traditionally conservative underwriting and top pedigree management. Earlier some analysts did sound the bell of caution when Uday Kotak said his bank would be careful in extending loans, as banks continue to stay risk-averse. Kotak Mahindra Bank already had a strong capital position, with standalone/consolidated CET 1 at 17.3%/19.1%. After Rs 7,442 crore raised through the QIP, the CET 1 will rise by 282bps/232bps (based on Q4 RWA) to 19.9%/21.4%, being the highest among large banks.

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