The Money Multiplier

Uday Kotak has a simple piece of advice for his team for the next phase of the Rs 4 lakh crore market cap Kotak Groups journey into the future. "I am putting this as a modest request to the future team. Let's work on producing returns for shareholders," says Kotak, the 60-year-old Managing Director and CEO of Kotak Mahindra Bank. Kotak simply expects the 60,000-member Kotak family to deliver the returns that the group has given in the last three-and-a-half decades. The group has given average compounded returns of 40 per cent since its journey began in the 80s. So, if an investor had put in Rs 1 lakh in young Kotak's dream way back in 1985, the investment would be worth Rs 2,500 crore today. That is no small achievement for a first generation entrepreneur whose joint family (with 60 people) was into commodity trading.

Kotak started the business as a small financial services outfit and later converted it into a bank in 2003. Rana Kapoor's Yes Bank was the only entity that secured a banking licence from the Reserve Bank of India (RBI) in the 2000-10 decade.

Over three decades, Kotak has followed a strategy of universal banking by expanding into non-bank businesses like insurance, mutual funds, private equity, asset management etc. Currently, State Bank of India, ICICI Bank and HDFC Group are the only three other major groups with a similar presence in banking and non-banking businesses. However, for all of them the banking platform remains the biggest of all the businesses.

In the last five years, Kotak Mahindra Bank has recorded 25 per cent-plus CAGR in consolidated net interest income at Rs 14,748 crore, in net profit at Rs 7,204 crore, in total assets at Rs 3.95 lakh crore and in loans and advances at Rs 2.43 lakh crore in 2018/19. Its level of current and savings account (CASA) or the low-cost deposits, is the highest in the industry at 52.5 per cent. The high proportion of low-cost deposits gives the bank a competitive advantage to play the pricing game and improve margins. That is also one of the reasons why the bank enjoys one of the highest price to book ratios in the stock market.

It is this all round performance of the bank that has pole vaulted its founder to becoming the Best CEO in Banking in the eighth edition of Business Today's Best CEO study.

The bank is riding high when the entire banking industry is facing challenges from multiple fronts. Most of the industry is running on only one engine, retail banking, after the near total collapse of corporate lending as many companies are burdened with over-capacity and are over-leveraged. The overall asset quality has deteriorated and many banks have seen divergences in the NPA reported by them. The industry also saw some top CEOs exiting because of non-performance, governance issues and professional misconduct. The Kotak Group, however, remained unscathed.

"We just do things that make sense. We use common sense principles in business as we do in real life," says Kotak, who has another decade to guide the group in an executive capacity as the maximum retirement age for private bank CEOs is at present 70 years.

A couple of months after the global financial meltdown shook the world in 2008, Kotak was at a global forum in Davos where he was asked a question: what should a good bank be like? Pat came the reply: "A good bank must have three human qualities," said Kotak, "prudence, simplicity and humility." Kotak firmly believes that a bank being the institution that provides leverage should itself stay away from excessive leverage. Banks should not encourage complicated or exotic products like derivatives, etc. Banks are also not the masters of the universe, and so should have humility, he had said.

"As long as we keep these three human qualities at the core of who we are and run a financial institution on these three principles with trust and governance, there is no reason to be carried away (by any other distraction)," says Kotak.

Being steadfast in following these principles in his businesses is perhaps why Kotak is often sought by regulators. Recently, he was asked to head the board of IL&FS, which collapsed due to asset liability mismatches. The team under Kotak has set in motion a resolution plan for over 65 entities with debt of Rs 36,400 crore. The board has met 25 times in the last one year. The wage bill was reduced by 45 per cent and office space was also consolidated. The aim is to achieve resolution for a significant quantum of debt by March 2020.

Kotak Mahindra Bank's focus will be on low-cost deposits and risk-adjusted returns. "As long as you do it properly, manage your balance sheet with common sense and in a sensible and sustainable manner, where you think about a business as a going concern for the long term and not for the next quarter, you normally find your way out," he says.

The bank has a focus on retail business with almost half of its portfolio comprising of home loans, loans against property, personal loans, commercial vehicle loans, etc. The other half is corporate banking. There are no big, chunky project loans or financing to sectors such as infrastructure, power etc. Out of the 1,500-plus branches, the majority are in metro and urban centres. The remaining one-third of the branches are in rural and semi-urban areas.

In terms of capital, the bank is quite comfortable at 18.2 per cent capital adequacy ratio. Its net NPA is also among the lowest at 0.85 per cent.

Unlike many other banks, Kotak Mahindra Bank is building a universal banking model with interest in insurance, private equity, asset management, etc. "We see the financial sector as a holistic piece and India is at a very early stage of growth in financial services," says Kotak about the potential of the financial services business. He also sees consolidation taking place in the sector in the future. "We are always open to inorganic opportunities," he says. The merger of ING Vysya Bank with Kotak Mahindra Bank in 2015 was one of the biggest mergers in private banking.

The banking industry as a whole is also facing challenges apart from NPA. Digital banking, for example, is completely changing the way banking is conducted. Fintech firms and large social media players pose a serious threat, eating into functions that banks traditionally did. Public sector banks are going through drastic changes especially with the government deciding to create 10 large national and regional banks. So, while the private sector banks may have gained at the cost of PSBs in the past, the latter will now come back with a stronger balance sheet.

Kotak, however, is unmoved. He wants to focus on better governance, building a sustainable business model and giving returns to shareholders. He says he is building an institution for the future. "If what you create does not outlive you, you have failed."

@anandadhikari