A tale of derring duo
Kotak Bank and YES Bank started about the same time and are growing smartly - but with distinct strategies.
They are both towering personalities in the world of finance. One is a professional banker who went on to start a bank; the other is an entrepreneur who founded a financial services firm when in his mid-20s and, 18 years later, his nonbanking finance company, or NBFC, became the first to convert into a bank. The common thread: Both got their banking licences in 2003-04, a few quarters apart.
The journeys of Rana Kapoor's YES Bank, and Uday Kotak's Kotak Mahindra Bank, or KMB, began around at the same time. But the routes could not be more different. YES Bank has positioned itself as a bank for "future businesses of India" - think food and agribusiness, life sciences and renewable energy.
Kotak's model has evolved over the years, starting with car finance and investment banking to include, more recently, private equity, asset reconstruction and even a stake in a commodities exchange.
The destinations are pretty much similar. Kapoor has declared he wants to be the "best quality bank of the world in India" by 2015. And last fortnight he told BT that many of his employees - "at all four levels of our management structure" - are millionaires via stock options. "We will be the Infosys of banking," declares Kapoor. That pride of achievement is visible in Kotak, too. "I am genuinely a believer that we have the best financial model anywhere on earth," he told BT a little over a year ago.
In the BT-KPMG Best Banks rankings, YES Bank is on top of the heap in the mid-size category - banks with a balance sheet size less than Rs50,000 crore as of March 31 and with more than 10 branches. Robust growth in loans and advances, fee income and operating profits helped YES lead the pack. At No. 2 is Kotak, which has also done well on the growth parameter, but falls short on asset quality and productivity and efficiency. When both these banks started, they knew they had to do something different to stand out from the rest of the banking pack. As Dipak Gupta, Executive Director, KMB, points out, the core team had to figure out a way of differentiating the 239th bank in India.
"When we started we knew nothing about banking," says Gupta. "Most of our experience was on the capital markets side." For the first six months after converting into a bank, Kotak had just four branches. "We portrayed ourselves as a bank plus," says Gupta. "But the internal joke was: the plus is visible, but where is the bank?"
For the next few years, not much changed. The traditional strengths that Kotak brought along were retail lending and capital markets advisory. "These were the cores and the differentiation we chased in banking was related to financial advisory," says Gupta. KMB, in the early years, was not too keen on opening traditional savings accounts. "We were keener to open investment accounts," says Gupta. That's how the banking journey began with a focus on retail - but with not too many branches. Till March 2007, KMB had some 105 branches.
The global credit crisis of 2008 pushed KMB to review its strategy. Today, claims Gupta, the bank is visible. "The changed market environment is such that the plus is relatively small now." Businesses other than banking, like asset management, broking and life insurance, formed three-fourths of the business pie in 2004. Those non-banking activities, points out Gupta, have now shrunk to a fourth. KMB today has 278 branches, and 617 ATMs across the country.
Over the past few years, Kotak's profit contributions from the two main capital markets businesses - securities and investment banking - have progressively decreased. And the banking activities have come to the fore in contributing to the bottom line, point out analysts at Macquarie Research in a mid-October report. "The banking business indeed has shown a commendable turnaround, with return on equity improving rapidly," says Suresh Ganapathy, Head of Financial Research at Macquarie Securities Group in the report. From a mere 19 per cent five years ago, banking, along with auto finance, contributes nearly three-fourths to overall profits.
For YES Bank, the build-up has been brick-by-brick. What would have worked in Kapoor's favour is his extensive experience in Indian banking. After a 15-year stint at Bank of America from 1980, Kapoor went on to head ANZ Grindlays' Investment Bank. He then was instrumental in setting up Rabo India Finance, a corporate finance and investment banking organisation with Rabobank as a partner. By 2003, Kapoor had sold his shares to the Netherlandsheadquartered bank - and was all set to flag off YES Bank.
Rabo is a partner in YES Bank (although it sold a chunk of its holding earlier this year). The Rabo influence would have convinced Kapoor to look beyond traditional banking - into areas like food and agribusiness research and advisory, for instance, where Rabobank is a key player globally.
Clearly, Kapoor prefers to avoid businesses and sectors that are the preserve of YES Bank's more established peers. For instance, his bank was able to spot the opportunity in renewable energy early on. That explains the relationship built with wind energy major Suzlon Energy - YES Bank has been the financial advisor and finance arranger for Suzlon's global acquisitions, like that of REpower Systems of Germany. Such a niche focus may explain why Kapoor says: "As a small greenfield bank we have neither faced serious competition nor we have been serious competition for anyone."
Ironically, if the global credit crisis pushed KMB out of its inertia, YES Bank may have been tempted to take its foot off the accelerator because of it. Kapoor is candid when he says that despite being wellstocked on capital - the bank has raised Rs1,799.63 crore in four rounds of equity raising - YES Bank was not aggressive enough in retail expansion or in brand building. "We could have done better on the branch roll-out front. However, there was a certain scare in 2008. Second, we should have invested in our brand much earlier, in the 2005-2009 period. We thought because we had a very successful IPO the work was done. However, since we have started investing in the brand it has made a difference to our people," adds Kapoor.
Now may well be the time for YES Bank and KMB to make the next big leap. Observers point out that the brand recall of YES Bank is not proportionate to its size; it is still not large enough to make a decisive impact. For Kotak the challenge is to derisk the business further, and reduce the cyclical impact of the nonbanking businesses - the capital market-related ones - on income and profits.
Kapoor avers that "Version 2.0 of YES Bank, which started in April 2010, is all about scale". The focus will be on revenue diversity with retail, small and medium enterprises, and emerging markets as areas of focus along with risk and cost management.
The bigger goal: to grab up to 2 per cent of India's banking business by 2015, up from 0.6 per cent currently. YES Bank has 150-odd branches and has a ramp-up plan for 750 by 2015. Kotak, for its part, wants the bank to be more visible, with 500 branches by 2012. This will help KMB broaden its base of customers, by moving down the pyramid from high net worth customer to the mass affluent and also cater to more non-retail customers.
In many ways, both YES Bank and Kotak are uniquely placed to be unfazed by competition - past and future. As Kapoor puts it: "Just as we were not even pin-pricks for Axis, ICICI or HDFC Bank, similarly if new banks are allowed, they will not see us as competition and we will not see them as competition by the time they arrive on the scene."
The challenge for both is to grab opportunities - which may be very different for the two banks - and provide a more comprehensive offering to their customers.
Niche is nice, but scale is super.
The journeys of Rana Kapoor's YES Bank, and Uday Kotak's Kotak Mahindra Bank, or KMB, began around at the same time. But the routes could not be more different. YES Bank has positioned itself as a bank for "future businesses of India" - think food and agribusiness, life sciences and renewable energy.
Kotak's model has evolved over the years, starting with car finance and investment banking to include, more recently, private equity, asset reconstruction and even a stake in a commodities exchange.
 Rana Kapoor Bank: YES Bank Founded in: August 2004 Strategy: Retail and niche knowledge areas on the corporate side such as renewable energy and agriculture Balance sheet size: Rs 51,796 crore (as of September 2010) Strengths: Sharp focus, motivated and young team |
In the BT-KPMG Best Banks rankings, YES Bank is on top of the heap in the mid-size category - banks with a balance sheet size less than Rs50,000 crore as of March 31 and with more than 10 branches. Robust growth in loans and advances, fee income and operating profits helped YES lead the pack. At No. 2 is Kotak, which has also done well on the growth parameter, but falls short on asset quality and productivity and efficiency. When both these banks started, they knew they had to do something different to stand out from the rest of the banking pack. As Dipak Gupta, Executive Director, KMB, points out, the core team had to figure out a way of differentiating the 239th bank in India.
"When we started we knew nothing about banking," says Gupta. "Most of our experience was on the capital markets side." For the first six months after converting into a bank, Kotak had just four branches. "We portrayed ourselves as a bank plus," says Gupta. "But the internal joke was: the plus is visible, but where is the bank?"
For the next few years, not much changed. The traditional strengths that Kotak brought along were retail lending and capital markets advisory. "These were the cores and the differentiation we chased in banking was related to financial advisory," says Gupta. KMB, in the early years, was not too keen on opening traditional savings accounts. "We were keener to open investment accounts," says Gupta. That's how the banking journey began with a focus on retail - but with not too many branches. Till March 2007, KMB had some 105 branches.
The global credit crisis of 2008 pushed KMB to review its strategy. Today, claims Gupta, the bank is visible. "The changed market environment is such that the plus is relatively small now." Businesses other than banking, like asset management, broking and life insurance, formed three-fourths of the business pie in 2004. Those non-banking activities, points out Gupta, have now shrunk to a fourth. KMB today has 278 branches, and 617 ATMs across the country.
Over the past few years, Kotak's profit contributions from the two main capital markets businesses - securities and investment banking - have progressively decreased. And the banking activities have come to the fore in contributing to the bottom line, point out analysts at Macquarie Research in a mid-October report. "The banking business indeed has shown a commendable turnaround, with return on equity improving rapidly," says Suresh Ganapathy, Head of Financial Research at Macquarie Securities Group in the report. From a mere 19 per cent five years ago, banking, along with auto finance, contributes nearly three-fourths to overall profits.
For YES Bank, the build-up has been brick-by-brick. What would have worked in Kapoor's favour is his extensive experience in Indian banking. After a 15-year stint at Bank of America from 1980, Kapoor went on to head ANZ Grindlays' Investment Bank. He then was instrumental in setting up Rabo India Finance, a corporate finance and investment banking organisation with Rabobank as a partner. By 2003, Kapoor had sold his shares to the Netherlandsheadquartered bank - and was all set to flag off YES Bank.
 Uday Kotak Bank: Kotak Mahindra Bank Founded in: March 2003 (by converting the NBFC into a bank) Strategy: Create a fi nancial supermarket by making the bank an integrator for a gamut of financial services Balance sheet size: Rs 45,985 crore (as of September 2010) Strengths: A strong mix of capital market-related offerings coupled with a sharp focus on wholesale banking |
Clearly, Kapoor prefers to avoid businesses and sectors that are the preserve of YES Bank's more established peers. For instance, his bank was able to spot the opportunity in renewable energy early on. That explains the relationship built with wind energy major Suzlon Energy - YES Bank has been the financial advisor and finance arranger for Suzlon's global acquisitions, like that of REpower Systems of Germany. Such a niche focus may explain why Kapoor says: "As a small greenfield bank we have neither faced serious competition nor we have been serious competition for anyone."
Ironically, if the global credit crisis pushed KMB out of its inertia, YES Bank may have been tempted to take its foot off the accelerator because of it. Kapoor is candid when he says that despite being wellstocked on capital - the bank has raised Rs1,799.63 crore in four rounds of equity raising - YES Bank was not aggressive enough in retail expansion or in brand building. "We could have done better on the branch roll-out front. However, there was a certain scare in 2008. Second, we should have invested in our brand much earlier, in the 2005-2009 period. We thought because we had a very successful IPO the work was done. However, since we have started investing in the brand it has made a difference to our people," adds Kapoor.
Kapoor avers that "Version 2.0 of YES Bank, which started in April 2010, is all about scale". The focus will be on revenue diversity with retail, small and medium enterprises, and emerging markets as areas of focus along with risk and cost management.
The bigger goal: to grab up to 2 per cent of India's banking business by 2015, up from 0.6 per cent currently. YES Bank has 150-odd branches and has a ramp-up plan for 750 by 2015. Kotak, for its part, wants the bank to be more visible, with 500 branches by 2012. This will help KMB broaden its base of customers, by moving down the pyramid from high net worth customer to the mass affluent and also cater to more non-retail customers.
In many ways, both YES Bank and Kotak are uniquely placed to be unfazed by competition - past and future. As Kapoor puts it: "Just as we were not even pin-pricks for Axis, ICICI or HDFC Bank, similarly if new banks are allowed, they will not see us as competition and we will not see them as competition by the time they arrive on the scene."
The challenge for both is to grab opportunities - which may be very different for the two banks - and provide a more comprehensive offering to their customers.
Niche is nice, but scale is super.
