When assumptions get challenged, it can work both ways for a stock. With Kotak Mahindra Bank, what next after Uday Kotak, the former MD & CEO of the bank and its promoter and single largest shareholder steps down from his position later this year, was a hangover since 2022.

When Kotak tendered his early resignation, a move that caught everyone unawares on September 2 (with effect from a day earlier), the market didn’t take it kindly. Likewise, last weekend, when the bank announced that former veteran banker Ashok Vaswani is set to take charge as MD & CEO by January 1, 2024, the stock declined by over 1.6 per cent on October 23. It once again defied the expectation that one of Kotak’s old hands — KVS Manian or Shanti Ekambaram — would take over the top job.

In other words, over the last 12–18 months, outcomes at Kotak Mahindra Bank have been very different from what was anticipated, and this is amply reflecting in its stock price.

On a year-to-date basis, Kotak Mahindra Bank stock is down about 7 per cent and 9 per cent on a year-to-date and 1-year basis respectively. Even on a 3-year or 5-year time frame, it has underperformed the broader indices. What’s more, the levers for reversal of this underperformance don’t seem apparent at this juncture. At 3.6x FY24 expected price to book, the strength of its financials is already baked into its valuation.

For instance, while the bank has seen some shrinkage in net interest margin (NIM) or profitability as is the case with the sector, at 5.1 per cent, Kotak Mahindra Bank is among the top performers in this parameter. In fact, as cost of depositsrises, NIM could shrink. Likewise, the bank has been steady in delivering loan growth while maintaining asset quality. At 1.7 per cent gross NPA and 0.4 per cent net NPA, Kotak is among the best in class. But it is exactly the aspect on asset quality which is getting challenged with the appointment of Vaswani. That’s the downside risk which seems to be the black box for now.

Axis Bank, YES Bank or RBL Bank are some prominent examples in the recent years, which have had external CEOs stepping into the ring. In these cases, there was a problem to be mended, kitchen sink clearing to be done and even overhauling the operational practices of these banks.

Invariably, the first 3-year term of a CEO gets consumed in just addressing the issues for which they were appointed, and growth may take a backseat. Sometimes, this could hold true even if an internal hand is elevated to the CEO’s job; examples being Sumant Kathpalia of IndusInd Bank and Sandeep Bakhshi of ICICI Bank.

To that extent, the Street’s concerns over Kotak Mahindra Bank hold merit. That said, Kotak is known to be a conservative banker, taking the foot off the gas ahead of the crisis hitting the banking sector.

Therefore, It is only post March quarter results when Vaswani meets investors with a report card for FY24, will we get a sense of his agenda at the bank and whether there are asset quality issues to tackle. If these concerns are assuaged, the stock underperformance may reverse.

Until then, given the bank’s pedigree and its positioning as fourth largest private bank, there’s a case for investors to stay put with the stock. Don’t rush to exit your holding (or take fresh positions) in the stock until clear answers emerge.