MUMBAI: With the standoff between its promoter and the sector regulator now resolved, the overhang on the Kotak Mahindra Bank stock has now lifted.

Will the stock fly? Before we answer that, it pays to look at how the truce came about.

According to Reserve Bank of India’s 2015 licensing rules, private sector banks need to bring down their promoter stake to 40% within three years of commencing operations. Then progressively, the stake needs to be pruned to 20% within 10 years and 15% within 15 years.

The disagreement between promoter Uday Kotak and the RBI was triggered first in August 2018 when the bank proposed to bring down promoter stake through issuance of perpetual non-cumulative preference shares (PNCPS). The issue was aimed to cut stake to 19.7%. The regulator refused to permit the same following which the bank dragged the RBI to court. The parties reached an agreement in February that promoter shareholding can be brought down to 26% by August 2020. Towards this goal, Kotak has sold 56 million shares through block deals to bring down his stake.

To be sure, Kotak Mahindra Bank remains one of the most expensive stocks among private sector lenders. Despite being 17% down from its peak in February, the stock trades at 3.4 times its estimated book value for FY21. Peers such as ICICI Bank and Axis Bank trade at a modest 1.2 times and 1.9 times their estimated book value for the same period.

This has not deterred investors at all. In fact, the stock has outperformed the Nifty since the trouble with the regulator began. Also, Kotak was able to sell his stake at the upper end of the price band to a slew of investors from foreign pension funds to domestic mutual funds.

The added comfort of compliance is reflected in the roughly 2% gains in shares in early trade today.

Analysts believe the bank’s business performance would now set the tone for the share price. “From here on everything depends on how asset quality pans out for lenders. Compared with peers, Kotak Mahindra Bank is still an expensive stock but it is also a defensive play,” said Anand Dama, analyst at Emkay Global Financial Services Ltd.

The lender is well placed on the asset quality front as it has set aside more money than regulatory mandate towards covid-19 risks. Even so, investors would want to see how the first and the second quarters stack up for the bank in terms of asset quality.

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