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BW Businessworld

Bigger Is Always Better

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The India story should be viewed as a movie and not a photograph,” says Uday Kotak, executive vice-chairman and managing director of Kotak Mahindra Bank (KMB). Sage counsel from the man of the moment — his KMB recently announced that its is acquiring ING Vysya Bank.
To top it off, Kotak is also the BW-PwC Best Banks’ Survey 2014’s ‘Banker of the Year’. It’s a testimony to how lucky young Kotak was to have the kind of  teachers he did in his formative years.
“I am reminded of my early days, when I was taught the first principles of finance: if you put in Rs 10 of equity and borrow Rs 100, you can lend out Rs 110. However, if just Rs 5 of the Rs 110 goes bad, you lose 50 per cent of your equity, and it takes just Rs 10 of assets going bad to bankrupt you,” he says. It makes you wonder why he opted to be a banker, but then he cared about it enough to put his family name on the door.
Spring After Winter
In tough times, some prefer to tread with caution; this is seen by many as an admission of defeat. Kotak belongs to the first school of thought — he gave the go-by to sectors that were the “flavours of the season” not too long ago. Some of these, such as commercial vehicles and construction equipment, were among the areas in which KMB had a long-standing interest. Infrastructure, too, got the cold shoulder. But loans to small and medium enterprises (for working capital) and certain segments of the economy continued to be on the bank’s menu. “The balance sheet of a bank is more important than its current P&L,” he says. In other words, it makes no sense to chase market share if, in the end, it upsets your entire applecart.
In the meantime, he worked towards growing and improving KMB’s liabilities. The bank’s deposits grew 15.8 per cent to Rs 59,072.3 crore in end-March 2013, while savings’ bank (SB) deposits rose 38.8 per cent to Rs 10,087.1 crore. It may surprise you to know that the bank offers 6 per cent on its SB accounts, despite the average cost for this mop-up being 5.5 per cent. Its current and savings accounts (the higher it is, the better from a cost of funds point of view) plus term deposits below Rs 5 crore stood at 63.4 per cent of total deposits, while its net interest margin stood at 4.9 per cent (up from 4.6 per cent last year). The operational efficiency of the bank improved with a fall in the cost-income ratio to 49.7 per cent (from 50.6 per cent last year). “It would have been lower, but the fact is that the cost of servicing low-ticket loans is high even if they offer better spreads,” explains Kotak.
A Perfect Match
Kotak knew that come 16 May 2014, there would be a change of guard in New Delhi. “We ended last year at around 4.5 per cent (GDP growth). I see the current year at 5.5 per cent. The average of our next five years could be 6.5 per cent.”
For the bank, if the past fiscal was a period of “capacity building”, with ING Vysya Bank in its belly, Kotak has reasons to believe the time for a “bigger, better Kotak” (as in KMB) is now. And for it to live up to its corporate symbol: a lemniscate — or ‘horizontal 8’ — that signifies infinity. 
If you go by the grapevine, the ING Vysya Bank deal has been in the works for some time now. It, however, picked up momentum soon after the south India-based bank’s board met on 28 October. On 20 November, the board members of the two banks finally shook hands.
Inorganic growth was always on Kotak’s mind. And in ING Vysya Bank, he claims he has hit the jackpot; it has just the kind of network he always wanted. 
KMB with 641 branches has a better footprint in the west and the north. Very different to that of ING Vysya, whose 573 branches are largely concentrated in south India — particularly in Andhra, Telangana and Karnataka. Besides, the latter’s clientele cuts across segments; it is known for its SME business and links to several large global corporates, thanks to the Netherlands-based ING Group.
If you go by the size of the merged entity ­­— at Rs 1,25,000 crore — it is a tad above what you got after the reverse merger of ICICI with ICICI Bank in 2002. The union with ING Vysya has pushed KMB to the fourth position among private banks, but in the pecking order of domestic banks, it is still down the league table. This, however, should not distract shareholders — it only shows how much the banking system as a whole has grown over the past one and a half decades (KMB was not even around when the ICICI transaction took place). “Size will matter, but you have to start somewhere,” says Kotak.
It’s not clear at this point just how this merger will pan out. When the ING Group joined hands with Vysya Bank in 2001-2002, it was the first of its kind: a foreign banking group piggybacking on an old private bank (a year earlier, it had acquired the investment banking practice of Bank of America). In subsequent years, ING Vysya served as a case study for all the problems associated with such a union. But all credit to the Dutch for turning the entity around.
Kotak, a Piscean, will now be counted in the pantheon of Indian banking greats. The fish has swallowed the lion (ING’s symbol). Should other bankers beware the Ides of March? Is rounding off infinity next?
(This story was published in BW | Businessworld Issue Dated 29-12-2014)