Bank On The Aggression Of Kotak Mahindra

WHY PRIVATE BANKS ARE GROWING IN INDIA

Private banks in India have been darling of investors, especially during last three to four years and the categories include both the foreign and local players. They have reasons too to justify their liking towards the private players in the banking sector. Private banks as significant players in this industry have performed exceedingly well over the few years and created an impressive amount of wealth for its shareholders who have shown conviction in the private banking growth story in India.

Private banks, particularly those which started in the mid-90s and afterwards are witnessing one of the best period in the history of the industry since RBI opened up the sector.

With public sector banks (PSBs) continuing to struggle with nonperforming assets (NPAs) menace, the most interesting aspect that plays out in the favour of the private banks is the subtle and swift shifting of deposits and advances from the PSBs to the private banks. Private banks are these days clearly encashing on the PSBs' mistakes and one must say pretty smartly as well.

Several of the key PSBs struggling with bad loans have ceded market share both in deposits as well as credit to rivals in the private sector. There are exceptions though, but just a handful.

Not only are the private banks gaining market share from the slow to negatively growing public sector banks but also these tech savvy private banks are seen snatching the market share from the foreign banks. Private banks are again seen reaping benefits even as few foreign banks halt their loan expansion since the start of 2015 owing to fear of piling up bad assets. Some of them even cut the size of the business and presence in India.

The deposit portfolio in FY16 shrank for PSBs in stark contrast to the private banks' deposits for the same year which grew by 19.2 per cent, almost double the industry growth rate thus reflecting that the private banks have been steadily growing at the expense of the PSBs.

Past three years have also seen foreign banks slowing down their liability base (deposits) which worked in favour of the private banks. The growth rate for the foreign banks dropped to 15.4 per cent in 2015 and to 13.3 per cent in FY16 from 24.5 per cent in 2014 for the foreign banks which was still above the industry average though. PSB's market share dropped from almost 77.7 per cent in 2014 to 74.2 per cent in 2016, that works out to 3.5 per cent of the market share, which is actually how much the private banking sector has gained.

The story is similar when it comes to advances. The PSBs have been steadily reporting a decline in their loan portfolio. The foreign banks' loan portfolios have also not grown even as the private banks have been able to post steady growth in loan portfolio.

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THE BANK

Kotak Mahindra Bank (KMB) is the 4th largest private bank in India and definitely one of the most efficient private banks in the country that has impressed with its steady consistent growth over several years. Kotak Mahindra Bank is the flagship company of the Kotak Group. As on September 30, 2016, Kotak Mahindra Bank has a national footprint of 1,348 branches and 2,051 ATMs spread across 675 locations.

The Bank has four Strategic Business Units – Consumer Banking, Corporate Banking, Commercial Banking and Treasury, which cater to retail and corporate customers across urban and rural India. KMB has launched its International Banking Unit (IBU) in GIFT city (Gandhinagar) on May 3, 2016, which will offer foreign currency loans and deposits to corporates.

KEY STRENGTHS

KMB reflects a strong capital adequacy,also amongst the highest in the Indian banking sector which provides the basis for strong growth in a growing sector. The multiple growth engines at the bank makes it a lucrative private bank to be owned. KMB has a stable annuity flow driven business model which balances the volatility inherent in capital marketlinked revenues. One of the key strengths of KMB is also its ability to leverage its world-class infrastructure and technology to drive cost-efficiencies. Point in case here is its success in introducing and scaling up the digital banking activities.

KMB is also best positioned to tap opportunities in terms of foreign investments in India thus leveraging its network and global infrastructure. India as an asset class may continue to do well and KMB may gain from such a sustainable trend for the coming years.

KMB's robust banking platform and retail distribution network armed with its pan-India reach over 3,045 retail distribution points of the group allows a massive cross selling opportunity for the company.

Its strong bancassurance model has an impressive cross-sell ratio that can generate quality non- interest income for the private bank.

KMB's integrated financial services business model may prove to be a huge asset in coming years. Its mature businesses across most financial services products presents itself with great opportunities to participate in the growth story of India. The bank enjoys a leading position in various segments including retail banking, private banking, Insurance, Investment Banking, Institutional broking and asset management.

Asset quality is one of the strengths of this private bank. While there has been some stress in segments such as Emerging Corporate, Agriculture division and Corporate accounts, the Bank has an overall healthy asset quality.

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STRATEGY OF LOW COST LIABILITY 

At the core of the strategy for KMB has been to build a low cost and stable liability base. The strategy seemed to have been working for KMB for years and is expected to reap dividends going forward for the tech savvy bank that it is. The rate at which Bank's current account deposits, savings account deposits and term deposits are growing indicate an above industry average performance. Approximately 70% of the total deposits is contributed by CASA plus term deposits below Rs.5 crore.

811 – DIGITAL ZERO BALANCE ACCOUNT 

811 is a smartly designed zero balance account that comes with a virtual debit card and load of features. The account will pay an interest of 6% p.a on the cash lying in the account subject to certain minimum balance.

We believe the zero-balance account will enable the bank to grow its customer base significantly in coming couple of years as is evidently declared by the management as well.

As of now the company suggests that a maximum of Rs.2 lacs can be maintained in the 811 account and for maintaining further balance the account will require full KYC. The validity of the said account is one year, post which the full KYC will be required.

This could well be one of the most successful organic ways to grow in an ultra-competitive environment.

CONCLUSION 

KMB armed with a suite of products, technology and aggression will be able to snatch retail depositors from PSBs and corporate borrowers from the other market players including the foreign banks.

While introducing a digital zero balance account, the bank has recently declared itself as a catalyst in the "creative destruction" process that is faced by the banking industry.

Even as the success of the Bank will depend a lot on how successful the digital strategy implementation will be, it seems that the company has indeed institutionalised digitalisation and sees digitalisation as the key strategy to not only bring in cost-efficiencies and grow at a rapid pace but also to survive the disruption happening across the banking industry.

The bank's ability to identify opportunities well in advance can prove to be an asset going ahead. KMB identified opportunities ahead of the curve in car finance, ARD business, retail brokerage and domestic private banking.

While things look bright for private banks investors need to tread cautiously as the valuations aren't cheap. The challenge will be to grow profitably i.e maintaining the net interest margins.

We recommend a "BUY" in Kotak Mahindra Bank with a long-term view. Every dip in the share price will be a buying opportunity in the counter.

Kotak Speaks

Uday Kotak
Vice-Chairman and Managing Director,
Kotak Mahindra Bank

"We on a broader basis believe that there are three changing developments in Indian financial services. One is the digital transformation. The second is the whole area of stress and resolution of stress. Third is, in due course, consolidation in Indian financial services. 811 is our way of responding to the disruption in banking.811 is Kotak's symbol of constructive, creative disruption in banking services. The acquisition cost to get new customers under 811 is 80-90 percent lower than the current costs".