Mumbai: Kotak Mahindra Bank Ltd is scouting for potential acquisition targets, including banks, non-banking finance companies, brokerages and asset management firms, vice-chairman and managing director Uday Kotak, 51, said in an exclusive interview on Saturday.
The bank plans to double its branch network to 500 by December 2012, besides looking for inorganic growth opportunities. Kotak Mahindra isn’t scared of the prospect of more intense competition as the regulator prepares to allow new banks to enter the industry, Kotak said. “We believe that as long as competition is fit and proper and plays by the rules of the game, we would like to see a fair opening for the sector,” he said.
The bank is just seven years old, but the organization that started as a bill discounting and leasing firm turned 25 this year.
In the interview, Kotak said the promoters’ stake in the bank will come down to around 49% in “due course”. Edited excerpts:
You head a commercial bank, but the financial world sees you as an investment banker—one of the three famous Ks—the other two being (Hemendra) Kothari and (Nimesh) Kampani.
Investment banking is a business where the perception is larger than reality, but the way we look at ourselves today is (as) an integrated financial institution. Commercial banking, securities, investment banking, life insurance and asset management constitute a holistic financial institution.
When we started in 1985, we were just three people. Today, we have 20,000 people. We started with a capital of Rs30 lakh. Today, our market capitalization is Rs26,000 crore. We started with bill discounting and then went into car financing. In 1991-92, we went for investment banking. Along the way, we built a brokerage firm, a mutual fund in 1998, a life insurance company in 2001 and a commercial bank in 2003.
Feeling the heat: Uday Kotak says the Greece effect may reduce India’s GDP by 0.5-0.75%, and estimates growth to be at 7.5-8%. Abhijit Bhatlekar / Mint
Is there any missing link in your scheme of things?
We want to stick to financial sector broadly and most of it has been covered. We don’t intend to get into general insurance because we don’t think it’s completely aligned to core financial services. The other area that has interested us is market infrastructure. We have recently been given a stake in a multi-commodity exchange.
Will you start a stock exchange?
No. We are getting into a commodity exchange as an anchor investor. We’ve got an in-principle approval to be an anchor investor in the Ahmedabad Commodity Exchange. To start with, the bank and its subsidiaries will have 49% stake and the group 51%. We’ll have to bring it down to 40% in one year and 26% in five years. At this stage we don’t have any plan beyond this.
The promoters hold 51% stake in Kotak Mahindra Bank. Won’t you need to bring it down?
We have about 48% stake—myself and my family. In addition to us, Anand Mahindra, who is no longer a promoter, owns a little over 3%. So currently it’s about 51%. We think over time, between us as promoters and Anand Mahindra, who was a promoter when we became a bank, (we) will look at ways to bring it down to about 49%.
So you would not need to bring it down to 10%?
It’s a very interesting subject. First of all, the licensing conditions say promoters can have 49% (stake).
It’s a very important debate that you have flagged off. One of the challenges that the world has seen is that a very diversified ownership has given perverse results. The CEO in that situation gets disproportionate power without enough skin in the game. Does this work? The world is debating on this.
Another very interesting thing in the Indian context is: whenever Indian financial institutions tried to diversify ownership, they ended up becoming foreign companies. What do we want? If we look at the current FIPB (Foreign Investment Promotion Board) norms, they basically make some of my peers foreign companies. Is that a direction where we want to take our financial sector?
Is it right to interpret that you are not bound by the Reserve Bank of India’s (RBI) ownership norms in 2004 that stipulate promoters should have a 10% stake? Your licensing norms that cap promoters’ stake at 49% were issued in 2002.
You must look at February 2004 ownership norms carefully. They provide for ownership higher than 10% and even higher than 30%. So, there are norms within the 2004 guidelines that permit higher ownership.
RBI is set to give licences to new banks. Are you drawing strategy to face competition that will intensify? Should business houses be allowed to set up banks?
We as a bank are working towards reaching a 500-branch network by December 2012. When we started the bank in 2003, where were some of my larger competitors of today? They had a branch network of around 250. With that base, they moved up so fast. We are not necessarily scared of competition. We believe that as long as competition is fit and proper and plays by the rules of the game, we would like to see a fair opening for the sector.
So you favour corporations setting up banks? What about a larger role for foreign banks?
On the debate whether big business houses—I am not using the word industrial houses—should be allowed entry or not, I want to bring in two points. One, the banking business is a business of trust and credibility. What needs to be ensured is (that there is) no conflict of interests. The regulators and the policymakers will have a view on this. The issue is if my business interest is larger than my interest in a bank, how will I manage conflicts? Even the US struggled with this. General Electric (Co.) and Wal-Mart (Stores Inc. ) wanted to be banks for a long time and the US has not allowed that so far.
You want to double the branch network. Any plan for inorganic growth?
The plan to double the branch network is through organic growth. But we are looking for inorganic growth across a range of sectors. If there is an appropriate opportunity, we are looking for inorganic growth in banking, non-banking finance companies, brokerage and asset management.
At this stage, there is no deal to be cooked. Having said that, we are sniffing at a lot of opportunities. We are also very value-focused. It’s not easy for us to go for a deal that sounds irrational.
Your life insurance business is profitable. Any plan for an initial public offering (IPO)?
There is no plan for taking the life insurance company to the market. We believe in the concept of a one-firm culture—an integrated financial institution—and we are not in a hurry to spin off the subsidiaries into separate companies. Besides, we don’t need capital. The insurance company has significant buffer on solvency margin and the parent bank has a 19.5% capital adequacy ratio. There is no need to raise capital.
You want to keep the retail business at about one-third of the total loan book because retail gives you better margin. This is when most other banks make losses in the retail business.
The retail business can make money. There are two parts to retail—secured loans and unsecured loans. The place where a lot of banks have pressure is in the unsecured part. The secured part of retail is actually a good, sustainable business. If you manage the risk well, on longer term, the unsecured part can be a good business too.
You are known for making shrewd investment decisions and booking huge capital gains.
When we look at investments, we look at them in two categories—core or strategic investments which we do in financial services, and the other is financial or non-strategic investment. We build the core strategic piece; put in more money and look for acquisitions and not divestments.
Where does your media business figure?
It’s a pure investment and that’s it.
There were quite a few takers for ‘Business Standard’ (newspaper owned by Kotak and his family) in the past, but you didn’t sell it. Why?
It’s a very small investment we have and it has been an investment for a long time. We just felt that it was a good investment.
You know, I just look at it as an investment and I am (a) purist on that. India needs free media.
So you’ll not sell off?
It is owned by my family. The family will have to take the call. They believe that there is a need for independent media and I think that as a democracy—you come from the same stable—free media is good for the country. That’s how they think about this investment. It’s their call.
You’re closely associated with the government’s divestment process. Why do public sector companies fail to attract retail investors? Is it a failure of marketing the issues or pricing?
There are IPOs and FPOs (follow-on public offers). We’ve a very volatile market place, thanks to the Lehmans and Greeces of the world. The issuer has to decide the FPO price a few days before the issue opens. After the issue closes, retail investors are locked for 15 days before the stock is allotted. He can always buy or sell the stock in the secondary market during this time.
As far as IPOs are concerned, again the volatility in the market place is enormous.
Sebi’s (Securities and Exchange Board of India) move to shorten this period is very critical. Our issuance system needs to get more realistic to live markets. The levels of volatility and gyrations in the market would normally make average retail investors cautious. In fact, retail participation in the market—both primary and secondary—in recent times has been lower.
Your take on the Greece effect on Indian markets?
On technical implications, there could be volatility in (capital) flows which may impact the market in the short run. On the fundamental basis, there will be some impact on our GDP (gross domestic product) because of slowdown in trade between India and Europe. There is a price we may pay for that. My sense is we may probably have to give up about 0.5-0.75% of our GDP. That brings my GDP estimate for fiscal 2011 to 7.5-8%.
What about stock market?
If the investors can live through volatilities—the Sensex can be in the range of 15,000-15,500 on the lower and 17,000-17,500 on the higher side—in the short run and buy stocks in this range they can over time expect around 15% return over next three years.