Investing 101

Everything you need to know about Kotak Mahindra Bank – From how it came into being to how it averted every crisis in the past 10 years!

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Let’s be honest, Banking Sector has faced a lot of negative coverage in recent months. From a co-operative bank lending almost all of its capital to a single builder to a good-sized private bank running out of capital.

Be as it may, the Banking sector will never go out of fashion any time soon. Banking Sector is the financial backbone of an economy, and in India, it forms a big part of our Index as well.

So let’s delve deeper into Kotak Mahindra Bank, a bank I have been studying for the past 2-3 weeks.

This is what we will look at –

2 Amazing facts of this Bank!

If not for his father, Asia’s richest banker Uday Kotak would have been working for Hindustan Unilever. Uday’s father Suresh Kotak, convinced him to open his own business in a 300 sq. ft office space!

Anand Mahindra had made an investment of Rs 1,00,000 in November 1985 in Kotak Group. The value became worth Rs 1400 crore which yielded 45% compounded returns over the 32 years.  (As per April 2017)

Interesting history of how the bank came into existence!

In the 80s, Nelco, a Tata company, used to borrow money at 17% from banks to manage its working capital. Uday saw his friends making 6% on their bank savings deposits. He offered his friends a 12% return if they were willing to take Tata risk. He offered money to Nelco at 16%. The idea worked. Uday earned a spread of 4%, which coincidentally happens to be the same as what KMB is earning today. Back in the late 80s buying a car had to be done with cash. Citi was the only bank offering car loans and charged 13% flat interest. Uday offered the same 13%, and customers borrowed from him. Why would a customer go with Uday for the same 13% instead of a brand like Citi? In those days it would take up to 6 months to get a Maruti car. Uday booked 5,000 Maruti cars in advance and offered them to customers instantly. (Extended version of this story here)
(The above para taken from here)

A 14-year snapshot of the bank in numbers

The level of compounding of net profit for the whole entity and subsequently its subsidiaries is seen above. From FY07 to FY20, Kotak Mahindra bank (complete entity including all other subsidiaries) grew its net profits at a CAGR of 21.4%. Its 2 most notable businesses – Kotak Mahindra Bank and Kotak Mahindra prime have clocked a net profit CAGR of 31% and 18% respectively.

Kotak Mahindra Bank at a glance –

This is how the subsidiaries’ contribution to net profit has changed over a period of 13 years –

The bank and prime now contribute 78% to total net profits from 34% figure 13 years back!

A 10-year/39 quarter history of management commentary on the bank, financial services sector (click on a financial year to know the commentary made in each quarter by the management)

FY11 FY12 FY13 FY14 FY15
FY16 FY17 FY18 FY19 FY20

A 10 Year/39 Quarter history of whether the management have achieved what they said/guided for (Click on the hyperlinks to know what number was guided and what number was achieved)

Out of the 37 quarters in which Kotak Mahindra Bank made guidance, it has achieved guidance on 36 out of the 37 quarters! This translates into a success ratio of more than 97%!

FY11 to FY15

FY16 to FY20

How Kotak Mahindra Bank avoided every crisis, yes every crisis in the past 10 years?

A Bank avoids a crisis one time? Must be Pure Luck right? But avoid each and every crisis in the past 10 years and then it is not pure luck but a combination of excellent forecasting and quick action-taking. KMB’s history of avoiding risks and surviving is not limited to just the past 5 instances. During the Asian Crisis 1997, only 20 out of 4000 NBFCs survived and KMB was one of the companies to have survived. Mind you, the survival rate was just 0.5%.

The above examples show that Kotak Bank has always taken a cautious approach towards its lending and has not shied away from slowing down a particular segment just to insulate themselves from imminent risks. And it has played out amazingly well for them every time! The return of capital is more important than return on capital!

Demonetization – How Kotak fared versus peers during this crisis?

During demonetization, Kotak Mahindra Bank was the only bank from the above peer set to have reduced its GNPAs and NNPAs. At the same time, while the net profit of other banks got reduced due to heavy provisioning, Kotak Mahindra Bank and Axis Bank were the only ones to have increased their net profits.

The steady NIMs, when seen in conjunction with stable asset quality and increased profits, denotes how KMB not only got out unhurt from the demonetization crisis, it in fact grew its profits and advances during this time!

Golden words by Uday Kotak

Philosophy of Lending

Return of Capital > Return on Capital

Src – Q1FY18 Concall

Questioning the ways of Fee income clocked by some bank

Src – Q4FY16 concall

Doing what is right for business

Src – Q3FY20 concall

What does a good bank look like?

Banking is a very risky business where the inherent nature of the business is such that leverage is used to the extent of 5-10 times. So it goes without saying that banks are expected to lend conservatively, do excellent underwriting and not miss the forest for the trees (meaning not missing balance sheet strength for just P&L. We all know of a bank who did things simply for P&L and ended up capital-starved).

Does Kotak Mahindra Bank tick off the checklist of a good bank? Let’s see –

Lend ConservativelyCheck

Src – Q1FY20 concall

Excellent Underwriting – Check

Minimal exposures to Infra and Telecom. Even in Telecom, they have lent only to the strong players.

Src – Q2FY14 concall

Risk Discipline – Check

Src – Q4FY16 concall

Not missing the forest for the trees (meaning not missing balance sheet strength for just P&L ) -Check

Src – Q4FY19 concall
Src – Q2FY18 concall

Doesn’t debate its shortcomings, instead works hard on it – Check

Src – Q4FY14 concall

The bank clocked a Fee income of Rs 1000 Cr+ in Q4FY18 clearly showing that it works hard on its shortcomings!

No Funny Accounting/Only Conservative Accounting – Check

Src – Q2FY18 concall
Src – Q1FY13 concall
Src – Q1FY13 concall

Excellent level of disclosures – Check

Src – Q1FY17 concall

Conclusion

As of Q3FY20, Kotak Mahindra Bank is available at a price to book of 3.43x. The bank has steadily compounded shareholder wealth –

Src – Marcellus Blog

At the same time, it has kept its asset quality under check by way of excellent underwriting practices and proper classification of stress, built a strong liability franchise with customer stickiness and a lot of cross-selling, built a leading digital banking franchise, capitalized on every crisis by slowing down before it hits and rapidly growing after its effects, has allocated capital efficiently and last but not the least, it has been shareholder friendly with excellent levels of corporate governance and disclosures.

Bonus – More interesting information related to Banking

Uday Kotak predicts the next stress to come from this sector

Digital Theme complete explanation

Lessons from the Infra Sector

Banking lending space in India

Uday Kotak predicting the future with exact precision

ALM Mismatch and IL&FS Crisis explained

Why External fiduciaries(Assessors, Auditors, rating agencies, etc) cannot be relied on?

Selective liquidity in the market will lead to consolidation in the financial sector

Building a strong liability franchise

What is a Bank Yield?

Components of Fee Income

Breakeven of a Branch

Disclosure – Please do not construe this article as a piece of investment advice. It is written simply for educational purposes.

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