Kotak Shares Tumble After Ban on Cards and New Online Clients

Preeti Singh, Ashutosh Joshi and Alexander Sazonov, Bloomberg News

Customers enter a Kotak Mahindra Bank Ltd. branch in Mumbai, India, on Saturday, April 21, 2018. Kotak Mahindra is scheduled to announce fourth-quarter earnings on April 30. Photographer: Dhiraj Singh/Bloomberg , Bloomberg

(Bloomberg) -- Uday Kotak built his Kotak Mahindra Bank Ltd. over decades to become Asia’s richest banker. After India’s regulator slapped his firm with a surprise ban, he’s facing one of his biggest tests yet — and a dip in wealth.

The lender’s shares tumbled as much as 13% on Thursday after it was barred from adding new customers through its digital channels and from issuing fresh credit cards. As the largest shareholder with a stake of almost 26%, the billionaire founder bore the heaviest brunt from the selloff, the bank’s biggest in four years.

Kotak’s wealth declined by $1.2 billion to $13.1 billion on April 25, according to the Bloomberg Billionaires Index.

Rival Axis Bank Ltd. overtook Kotak’s market value for the first time since September 2016. Axis shares surged after its earnings beat analysts’ estimates.

The Reserve Bank of India cited governance and risks over Kotak’s technology systems as reasons behind its ban. It found deficiencies and non-compliance in various processes over two years — from a lack of data security and leak prevention strategies to vendor risk management — according to a statement late Wednesday.

Kotak said in response it has taken measures to adopt new technologies to strengthen its IT systems and will keep working with the RBI to swiftly resolve balance issues.

It’s not Kotak’s first run-in with the regulator. The billionaire previously took India’s central bank to court over the size of his stake in the lender. He ultimately agreed to reduce his ownership in 2020, ending the feud.

New CEO

It was only at the start of this year that Kotak handed the reins over to new Chief Executive Officer Ashok Vaswani. Vaswani has said scale will be critical for the bank’s growth, and that the lender has been investing in technology.

Read More: Kotak’s New Outsider CEO Seen as Break From Billionaire Founder

Kotak, a native of the western state of Gujarat, set up an investment company in 1985 with a 3 million rupee loan ($41,000) from family and friends and partnered with Mahindra the following year.

The financier was Kotak Mahindra Bank’s CEO since its beginning and gained more control of it in 2006 by ending a partnership of more than a decade with Goldman Sachs Group Inc.

Almost 98% of the transaction volume in Kotak’s savings accounts were by digital or non-branch methods, according to its most recent investor presentation for the quarter ended Dec. 31.

“The ban on online customer acquisition will have an impact on Kotak Mahindra Bank’s growth as it is one of the slowest lenders for physical branch expansions,” said Ashutosh Mishra, a banking analyst at Ashika. “The RBI ruling will create a negative sentiment on the bank.”

(Updates with closing levels throughout.)