Mumbai: Kotak Mahindra Bank Ltd is making a fresh charge to wrest corporate banking market share from larger private sector rivals, counting on its investment banking strength and the acquisition of ING Vysya Bank Ltd.
The bank, which vaulted to number four from number five in the pecking order of private sector lenders after the $2.4 billion (around Rs.15,025 crore today) acquisition announced in November, is seeking to engage with new multinational clients, increase its focus on the top 25 Indian companies and tap e-commerce firms as part of the effort.
“Our market share in the very large and mid-corporate segment is in single digits,” K.V.S. Manian, president (corporate, institutional and investment banking) at Kotak Mahindra, said in an interview on 15 April. “After the merger, the bank plans to tap the opportunity to grow in each of these segments.”
In the corporate banking segment, Kotak Mahindra competes with larger private sector lenders such as ICICI Bank Ltd, HDFC Bank Ltd and Axis Bank Ltd, besides public sector banks like State Bank of India, Punjab National Bank and Bank of Baroda.
On 4 April, Kotak Mahindra said it had merged its corporate and investment banking (CIB) units to create a “bigger, bolder and better” business.
The CIB division will have a special focus on 25 large business groups, such as Reliance Industries Ltd, Tata group and Aditya Birla Group, and will have separate divisions for other large companies and mid-level firms, said Manian.
Kotak Mahindra defines corporate loans as those made to companies with annual revenue of at least Rs.250 crore. Firms with a lower revenue are classified as small and medium enterprises.
Manian said Kotak will divide its CIB team to service companies based on their size—very large, large and mid-level—and also add a couple of new sections to service foreign multinational companies and the emerging e-commerce sector.
“The objective of the merger is to grow and become a bigger bank. The ING Vysya merger has made us even stronger on the corporate banking side. Hence, we see a unique opportunity ahead of us by leveraging our strengths in both corporate and investment banking together,” said Manian.
The acquisition, the largest in Indian banking, became effective from 1 April after the bank received all regulatory approvals.
Manian said Kotak will sign a cooperation agreement with the Netherlands-based ING Groep NV to service multinational companies in India to tap a segment in which the bank was limited to a single representative office in Dubai.
The merger of corporate and investment banking divisions runs contrary to a global trend in which banks are trying to create a distinction between the two businesses to reduce risk, according to Piyush Singh, managing director of financial services in India at consulting firm Accenture Plc.
“The idea is good, but focusing on specific verticals means that the bank has to have the capability to acquire scale in order to be successful; otherwise such models can become a drain on the finances,” said Singh.
Consolidation of the CIB businesses into one division within the bank has made Manian the sole head of CIB, with former investment banking managing director and chief executive officer T.V. Raghunath reporting to him.
Manian said the bank’s strategy is to offer non-fund-based products like foreign exchange, advisory and capital market services on both the debt and equity sides to large Indian companies.
“Very large companies do not seek lending, they can tap debt markets whenever they want and control pricing power on the lending side. We have to follow a market-led, multi-product strategy and not a balance sheet or lending strategy,” he said.
Kotak Mahindra has traditionally been a strong local investment bank, especially in the equity capital markets. It has been among the top five for the last three years and the fiscal year ended 2015, according to Prime Database, a primary market tracker.
It is this legacy that Manian hopes will fire his business in India.
“Ultimately, our aim is to wrest market share from our competition,” he said.
Kotak Mahindra has so far focused on lending for working capital loans. The bank’s corporate advances grew by 28% in the fiscal year ended March 2015, much faster than the banking sector’s industrial credit, which grew in single digits.
Even so, Kotak Mahindra’s corporate credit as of December 2014, at Rs.25,933 crore, was just a quarter of ICICI Bank’s Rs.1.08 trillion corporate book size.
Banks are hoping for an upturn in corporate credit demand as economic growth accelerates. According to the government’s economic survey, India’s gross domestic product is set to grow by 8.1-8.5% in 2015-16, up from an estimated 7.4% in the fiscal year ended 31 March.
Still, Kotak Mahindra is holding back from lending to some sectors like infrastructure that require long-term and large loan commitments.
“We are still not seeing major changes on the ground. The euphoria that we witnessed last year was irrational exuberance and realism took a back seat. We still have to see investments picking up in brownfield projects,” Manian said, adding that the onus is on the government to lead investments in infrastructure; private sector participation will only pick up in another 6-12 months, he said.
“We will only take exposure in infrastructure when the policy is clear because the risks can then be accounted for. We will not take undue risks for growing the book and profits in the short term, which then could come back to bite us,” said Manian.
The bank will announce its financial results for the fiscal year ended March 2015 on 5 May. Analysts polled by Bloomberg expect Kotak Mahindra’s consolidated profit to increase 18% to Rs.781 crore in the March quarter.