• MARCH 27, 2003

Kotak Bank: Would you open account?

Kotak Mahindra Finance (KMFL), the NBFC, is all set to convert itself into a bank by the end of this month. The company started operations in 1985 as a car financer and since then has come a long way. We look at the strengths of KMFL and the reasons behind this move.

Kotak Mahindra Finance (KMFL) is a conglomeration of six entities. These are Kotak Mahindra Capital Company (Investment Banking), Kotak Securities (Broking), Kotak Mahindra Primus (Auto Finance), Kotak Mahindra Asset Management (Mutual Funds) and OM Kotak Mahindra (Life Insurance). Apart from these, the holding company, i.e., KMFL itself is an NBFC engaged in commercial vehicle finance, structured and retail financing. The new entity namely, Kotak Mahindra Bank will involve all these separate entities offering their services under a common brand. The bank will seek to leverage on KMFL’s strong customer base of 500,000 customers.

KMFL's operational snapshot:
Assets Portfolio (Rs bn)27
Capital Adequacy Ratio (%)28%
Net NPAs to Net Advances0.01
Revenues 9mFY03 (Rs m)5,824
Operating Margins 9mFY03 (%)34.0%

What is noticeable about this set up is the fact that KMFL already offers a bouquet of services through its various subsidiaries. This means that the new bank already has a defined and successful product portfolio. Kotak Securities and Kotak Mahindra Primus are among the leaders in their respective businesses. Its car finance business, Kotak Mahindra Primus, is especially very successful and is among the top six players who together control nearly 70% of the car loans market.

Apart from KMFL’s diverse product portfolio, the company has been able to meet the RBI standards for capital adequacy and non-performing assets successfully. KMFL has a Capital Adequacy Ratio (CAR) of 28% while its net NPA (Non Performing Assets) to net advances ratio is very low at 0.01%. Compared to the RBI norms these figures look very good. However, we must point out that they are likely to see a correction as the new bank matures going forward. The new bank plans to embark on an expansion spree involving the setting up of an additional 75 branches in the next three years at an estimated capex of Rs 1.2 bn. The bank has comfortable capital levels with net worth close to Rs 10 bn.

Having enumerated the strong points of the new bank we would like to point out that KMFL has decided to enter the banking industry during its most competitive times. In our view, seeing the competition NBFCs witnessed by aggressive banks for retail customers, KMFL seems to have embraced banking in a bid to save its turf and attract low cost deposits. Lackluster industrial credit off take has forced banks to concentrate on the retail segment in a big way. This can be seen from the aggressiveness of banks in the home loan and personal loans segment. KMFL will have to battle vicious competition in order to acquire new retail customers. Also the bank’s strategy to focus on the higher income segments in major cities of the country will be put to test due to the existence of an already strong competition in this segment.

KMFL’s value proposition too is not too enticing, as it does not offer anything that is very different from what the new generation banks are currently offering in the country. For one, all new private banks are offering various financial services under one roof. KMFL’s experience as an NBFC has been quiet encouraging but operating as a bank would be a completely different ball game. KMFL is currently trading at Rs 167 at a price to book ratio of 0.9. Wait and watch.

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