Corporate Strategy Dossier.
“Think Investments. Think Kotak”
Benoy Paul Jose CBS.BFS.033 2/24/2010
Vision The global Indian financial services brand-
Our customers will enjoy the benefits of dealing with a global Indian brand that best understands their needs and delivers customised pragmatic solutions across multiple platforms. We will be a world class Indian financial services group. Our technology and best practices will be benchmarked along international lines while our understanding of customers will be uniquely Indian. We will be more than a repository of our customers' savings. We, the Group, will be a single window to every financial service in a customer’s universe. The most preferred employer in financial services-
A culture of empowerment and a spirit of enterprise attracts bright minds with an entrepreneurial streak to join us and stay with us. Working with a home-grown, professionally-managed company, which has partnerships with international leaders, gives our people a perspective that is universal as well as unique. The most trusted financial services company-
We will create an ethos of trust across all our constituents. Adhering to high standards of compliance and corporate governance will be an integral part of building trust. Value creation-
Value creation rather than size alone will be our business driver.
Three defining qualities of “Bank of the future” ⇒ ⇒ ⇒
Simplicity Humility Prudence
Significance of the group’s logo
“The symbol of the infinite Ka reflects our global Indian personality. The Ka is uniquely Indian while its curve forms the infinity sign, which is universal. One of the basic tenets of economists is that man’s needs are unlimited. The Infinite Ka symbolises that we have infinite number of ways to meet those needs.” ������
Kotak Mahindra Group Kotak Mahindra is one of India's leading financial organizations, offering a wide range of financial services that encompass every sphere of life. From commercial banking, to stock broking, to mutual funds, to life insurance, to investment banking, the group caters to the diverse financial needs of individuals and corporates. The Kotak Mahindra Group was born in 1985 as Kotak Capital Management Finance Limited. This company was promoted by Uday Kotak, Sidney A. Pinto and Kotak & Company. Industrialists Harish Mahindra and Anand Mahindra took a stake in 1986, and that's when the company changed its name to Kotak Mahindra Finance Limited. The group has a net worth of over Rs. 7,500 crore and has a distribution network of branches, franchisees, representative offices and satellite offices across cities and towns in India and offices in New York, London, San Francisco, Dubai, Mauritius and Singapore. The Group services around 6.7 million customer accounts.
The journey so far
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Key group companies and their businesses
Kotak Mahindra Bank-
The Kotak Mahindra Group's flagship company, Kotak Mahindra Finance Ltd which was established in 1985, was converted into a bank- Kotak Mahindra Bank Ltd in March 2003 becoming the first Indian company to convert into a Bank. Its banking operations offer a central platform for customer relationships across the group's various businesses. The bank has presence in Commercial Vehicles, Retail Finance, Corporate Banking, Treasury and Housing Finance.
Kotak Mahindra Capital Company-
Kotak Mahindra Capital Company Limited (KMCC) is India's premier Investment Bank. KMCC's core business areas include Equity Issuances, Mergers & Acquisitions, Structured Finance and Advisory Services.
Kotak Securities-
Kotak Securities Ltd. is one of India's largest brokerage and securities distribution houses. Over the years, Kotak Securities has been one of the leading investment broking houses catering to the needs of both institutional and non-institutional investor categories with presence all over the country through franchisees and coordinators. Kotak Securities Ltd. offers online and offline services based on wellresearched expertise and financial products to non-institutional investors.
Kotak Mahindra Prime-
Kotak Mahindra Prime Limited (KMP) (formerly known as Kotak Mahindra Primus Limited) has been formed with the objective of financing the retail and wholesale ������
trade of passenger and multi utility vehicles in India. KMP offers customers retail finance for both new as well as used cars and wholesale finance to dealers in the automobile trade.
Kotak Mahindra Asset Management Company-
Kotak Mahindra Asset Management Company Kotak Mahindra Asset Management Company (KMAMC), a subsidiary of Kotak Mahindra Bank, is the asset manager for Kotak Mahindra Mutual Fund (KMMF). KMMF manages funds in excess of Rs 20,800 crore and offers schemes catering to investors with varying risk-return profiles. It was the first fund house in the country to launch a dedicated gilt scheme investing only in government securities.
Kotak Mahindra Old Mutual Life Insurance Limited-
Kotak Mahindra Old Mutual Life Insurance Limited is a joint venture between Kotak Mahindra Bank Ltd. and Old Mutual plc. Kotak Life Insurance helps customers to take important financial decisions at every stage in life by offering them a wide range of innovative life insurance products, to make them financially independent.
Kotak's International Business-
With a presence outside India since 1994, the international subsidiaries of Kotak Mahindra Bank Ltd. operating through offices in London, New York, Dubai, San Francisco, Singapore and Mauritius specialize in providing asset management services to specialist overseas investors seeking to invest into India. The offerings are differentiated India investment solutions that span all major asset classes including listed equity, private equity and real estate. The subsidiaries also lead manage and underwrite international issuances of securities. Kotak’s international arm is positioned for managing assets in the Indian Capital markets. ������
Group Structure
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Kotak Mahindra Bank Ltd (KMBL) Kotak Mahindra Bank Ltd, is one of the prominent subsidiaries of Kotak Mahindra group. The activities of the company being parallel to its objective are very wide and cover all the components of a Bank. The Basic area of Operations is the Banking business, other products are meant for the regular revenue generation. KMBL offer complete solutions that address a wide range of financial requirements, both for individuals as well as for institutions. From everyday banking to long term investments — their offering covers it all. The Bank offers comprehensive business solutions that include Trade Services, Cash Management Service and Credit facilities. It has over 245 branches spread across 141 locations in the country offering both traditional banking products and investment advisory services. Apart from traditional facilities like deposits accounts, savings account, current account, term deposits, personal loans, home loans the bank has spread its wing in the investment services by providing its customer facilities like Demat, mutual fund and insurance. The bank has also opted for net banking, mobile banking and phone banking for convenience of its customers. Within a small span of 6 years, the bank has spread it wings in several sphere of finances. Presently, spread in 82 cities in India, the bank caters to the needs of its 5.9 million customers spread throughout the length and breadth of country and even abroad. By the end of FY 2008-2009, the Kotak Mahindra Bank had about 220 branches spread all over the country. The Bank has a high Capital Adequacy Ratio (‘CAR’). The CAR as at 31st March 2009 was 19.86% with Tier I being 16.01%. The CAR under Basel II was 20.01% with Tier I being 16.13%. At a consolidated level the CAR is 22.84% under Basel I. There were almost no Tier II lendings. The Net NPA of the bank at the year end 2008-09 stood at 2.02%.
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KMBL - Strategies Where they want to be.
Mission
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To be a world class Indian financial services group. To be the most preferred employer in the financial services. To be the most trusted financial company. Value based growth.
Defining Qualities
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Simplicity Humility Prudence Where they are.
Numerous awards for Kotak Investment Banking - “Best Investment Bank in India” in 2008. Kotak Mahindra Bank rated “Best Workplaces in India 2008” (study by The Great Places to Work Institute India). Kotak Investment Banking & Kotak Securities jointly awarded “Best Equity House in India” by Asiamoney in 2008. Presence in 6 major overseas cities.
How they get there.
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Value driven management Professional service Technological innovations - User friendly online banking service. - Mobile banking, SMS banking. All under one roof - Wide range of banking/financial products. - One account for multi- usage; Demat, Fixed Deposit, Term Deposit, Mutual funds etc...
Industry Analysis KSF’s of Kotak Mahindra Bank Ltd.
Efficient promoters. The promoter of KMBL, Mr.Uday Kotak has a good credibility in the industry. The board of directors of KMBL are prominent personalities from the Indian financial segments. They have a wide and in-depth knowledge of the industry as well as individual segments.
Key alliances.
Employee friendly.
Customer friendly service.
Efficient utilisation of technology.
Strong presence in different gamut’s of financial services.
Competition-
Although KMBL is a new entrant in the Indian Banking industry, they have come up with a stupendous growth. However, the booming Indian economy has attracted investments from across the globe, especially in the financial segment. This has led to many mergers and JV’s in the Indian banking segment. The entry of foreign banks has also increased the competition. The main competitors for KMBL are: 1. YES BANK Ltd. The YES BANK Ltd, founded by Rana Kapoor, is creating ripples in the private banking segment. Although they were only in the wholesale and corporate banking service, lately they have entered the retail banking as well. They have huge expansion plans in pipeline. From the private banks in India, YES BANK is a potential major competitor for KMBL.
2. Other Indian private banks which could be possible competitors – Axis Bank, HDFC Bank and ICICI Bank. ������
3. State Bank of India The State Bank of India has a wide presence throughout India. They have the largest retail customer base in India. The volume driven business of SBI is a major threat in the retail segment for KMBL. However, the technologically efficient and superior KMBL can attract new generation clients more than the SBI. 4. Foreign Banks Standard chartered bank.
Current Attractiveness-
The Kotak group has its presence in almost every aspect of the financial services in India. All these business are highly correlated. The group has its presence in commercial banking, stock/commodities broking, mutual funds, life insurance, investment banking, financing services etc... The mutual support of these businesses would give KMBL a higher bargaining power than any other Bank in India. The new generation customers are risk takers, and they look for investment opportunities to grow their wealth. KMBL directly has numerous investment avenues on offer for the clients. This would help the customers have better access to securitisation and have a good spread in their investment portfolio. The efficient management also makes KMBL very attractive. The Indian retail banking segment is still in a growth stage and the KMBL has many expansion plans in the pipeline. The regulatory measures from the RBI/SEBI may be a hurdle on the road. However, the management of KMBL has led the bank with high ethical values and foresight. All these factors make Kotak Mahindra Bank Ltd. investment attractive.
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Industry Value Chain
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A bank will have to acquire capital from sources like fixed deposits, savings accounts, term deposits etc... Thus formed capital is given out as lending’s (loans). This is their source of income. �� � � � � �
Future Industry outlook The Indian banking industry has a huge growth potential. There are many players coming for a share of the pie. This has prompted the RBI and other regulatory bodies to come up with more stringent regulations. Transparency would be emphasised more. The banks have to get themselves ready for these changes. The recent moves by the RBI like implementing a Base Rate in place of BPLR, making KYC norms stricter etc... have long term implications in the operations of the banks.
The following figure shows the Industry Life Cycle of Banking Industry in India, as well as that of KMBL.
Industry Life Cycle
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t u p t u O
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Maturity ����
Decline
Growth
Development
Time
The figure shows that KMBL lies in the development sector of the industry and the industry as such comes in between growth and development.
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Organizational Strengths Strengths
Efficient management.
Access to different financial products/services within the Kotak group.
Good employee relations.
Good capital adequacy. (23%)
Low NPA of 2.02% compared to industry (private banks) average of 3.51%.
Presence in foreign soil.
Opportunities
Being part of the India’s growth story
Utilise the emerging opportunity of getting the wallet share of the burgeoning middle class
Utilise technology to provide solutions to customers
Increase distribution strength
Threats
Volatile environment
Fiscal deficit
Volatile interest rate movements
Competition
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Corporate Governance-
The Bank believes in adopting and adhering to the best standards of corporate governance to all the stakeholders. The Bank’s corporate governance is, therefore based on the following principles: o
Appropriate composition, size of the Board and commitment to adequately discharge its responsibilities and duties.
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Transparency and independence in the functions of the Board.
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Independent verification and assured integrity of financial reporting.
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Adequate risk management and Internal Control.
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Protection of shareholders’ rights and priority for investor relations.
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Timely and accurate disclosure on all matters concerning operations and performance of the Bank.
The Bank’s philosophy on corporate governance enshrines the goal of achieving the highest levels of transparency, accountability and equity in all spheres of its operations and in all its dealing with the shareholders, employees, the government and other parties. The Bank understands and respects its fiduciary role and responsibility to shareholders and strives hard to meet their expectations. The Bank was ranked among the top five in Corporate Governance Practices in Asia/Pacific for the year 2009. The Bank has achieved this ranking for the second year in a row. For the current year, the Bank has been ranked as No 1 in Asia/Pacific and No 2 in the financial services industry across all the regions covered.
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Corporate Social Responsibility-
Conservation A bank can conserve more than just financial resources. The annual report is printed on 100% wood-free environmental-friendly paper. The paper has been manufactured as per the Siam Pulp and Paper Policy for environmental conservation and safety, and has been accredited by the Environmental Management System - ISO 14001. Through an internal initiative called ‘Kill Bill’, the group is pursuing a twopronged objective of conserving natural resources (water, paper, electricity, fuel) while simultaneously cutting costs through operational synergies . In order to embed this thought process in its culture, there is regular internal communication on how to reduce global warming, use car pools, maximize fuel efficiency, conserve water and so on.
Strategies followed The KMBL follows many innovative strategies so as to bring in synergies between their businesses as well as with their customers. Some strategic moves by the bank during the year 2008-09 are discussed below.
1. CASH NETThis is an alliance between Citibank, Industrial Development Bank of India, Kotak Mahindra Bank and UTI Bank. It is the country's first independent shared ATM network. IDBI Bank received permission from the Reserve Bank (RBI) to serve as the network's settlement bank. Cash net will give access to more than 1,300 ATMs for more than 6 million debit cardholders of the
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member banks. The alliance would constitute about a third of the total card base and 15 percent of the ATM base in the country. 2. Sunday BankingSunday Banking was launched in select branches which cater only to residential localities. 3. Customer Engagement Program (CEP)A formal Customer Engagement Program was started wherein the bank has a systematic calendar for contacting customers and periodically reviewing their banking needs. 4. Micro FinanceCollaborating with Micro Finance Institute's, NGO's and the govt. The entry via MFI’s, NGO and the government helps the Bank to get directly engaged in this business without direct efforts. The huge microfinance industry in India will boost the banks earnings; however there is a risk of NPA’s to increase. 5. Launch of credit cards – As a bank, this was the missing piece in its product suite. KMBL launched credit cards in April 2008 with an initial target of 350,000 cards. Due to the down turn and the recessionary effects there was a threat of people not paying and so they slowed down dramatically to end the year with just over 100,000 cards. The Bank took a call to discontinue outsourced acquisition and only source customers through internal sources or referrals. These measures helped in limiting the losses, the credit cards are less than 1% of its book. 6. Branch expansion-
The bank increased the number of branches to 217 towards the end of FY 0809. Although they went for steady expansion, these were not restricted only to urban areas. They set up branches in semi-urban areas too. This was a strategic move, because many of the semi-urban regions in India are emerging fast and it would also have access to nearby rural areas too.
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7. Branch bankingTheir initial target was to touch 260 plus branches by the end of the year. The eventual number was 217. The bank initially slowed down since rentals were falling really fast and it wanted to get better rates considering most branch leases are typically signed for nine-year periods. The slowdown call then continued due to the economic climate. While the bank continues to grow their branch network, it is worth noting that 16% of its customers actively use the online banking channel. In a young country, this number will only increase and the bank is working to make this channel simpler and more secure to use. 8. Cut on lending-
Since a lot of the problems in the lending business stemmed from the retail end, the bank placed a greater focus on lending to corporate clients. It brought down the retail landings from 89% to 80%. This helped them decrease the NPA’s from the retail segment. the excess fund was diverted to corporate lending. 9. SME lending’s-
Among small and medium corporates, the bank worked with companies that have a track record for raising capital. And among larger corporates, it worked with large companies (most of whom had raised money at attractive rates from overseas markets) and PSUs. In this segment, even though the yield is lower, the customer profile was in keeping with the bank’s emphasis on protecting the balance sheet. Besides, what it may lose in yield is made up through growing the corporate banking relationship as clients count on us for transaction flows, LCs, guarantees, pay orders, DDs, transaction fees and so on. In many cases, it goes on to sign up salary accounts, which helps build depositors. 10. Early exit from FX derivativesIn October 2007, KMBL decided to stop derivatives. A number of other banks realized there was a problem only around late January, early February. By taking an early call, KMBL were able to limit its losses. As a proactive risk �� � � � � �
management measure the Bank’s participation in the Securitization markets were also consciously moderated. These measures helped the bank considerably in keeping it aloof from the losses due to the downturn.
Conclusion Kotak Mahindra Bank is positioning themselves as ‘the bank of the future’. To support this vision, the management has ensured they serve the customer of the future, ie. the young Indians. They also strategically come up with products and services which this majority share of the customers would be comfortable with. The heavy dependency on technology and internet is a substantiates this. The only void in between their service was the rural population and the ‘bottom of the pyramid’ population. To cater this category of the population, they are strategically gone for partnerships with Micro Finance Institutions, NGO’s and even the government. This way KMBL will have their presence in this segment with lesser risk and cost. Even though KMBL has a comparatively lower NPA rate (2.02%) than the industry itself, those levels are also high. They need to address this issue at the earliest. Reducing lending’s to the retail customers is a short term strategy. For a longer term, they should come up with products which would cater both the requirement of the customer as well as reduce the risk of the lending too. Thus, on a whole, the ‘bank of the future’ is playing their cards smartly. They survived the down turn without much wounds. This proves the ability of the promoter and the management to guide the bank to a better stronger future.
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