Kotak Mahindra Bank's Uday Kotak: Leveraging its financial pedigree

It was one of those things, it just happened so fast," recalls Dipak Gupta. Sitting in his first floor office, Gupta, Executive Director, Kotak Mahindra Bank, is reminiscing about the recent investment Warburg Pincus International-one of the world's largest private equity funds with over $13 billion (Rs 57,200 crore) under management- made in the barely 19-month-old Kotak Mahindra Bank. From its origination in late September, the deal, personally supervised by Vice Chairman and Managing Director Uday Kotak, was clinched in two months flat. Warburg Pincus, already a stakeholder in companies like Bharti Tele-Ventures, Gujarat Ambuja and Moser Baer, shelled out Rs 75.9 crore through its funds, Madison Holding Ltd. and Melany Holdings, for a 2.75 per cent stake. That's Warburg's first investment ever in an Indian bank.

"It's a vindication of our business model and underlines the confidence of long-term investors in Kotak Mahindra," says a beaming Kotak. Sitting a floor above Gupta at the bank's headquarters in Bakhtawar building in Mumbai's Nariman Point, the 45-year-old banker has many reasons to feel the year has gone well for him. That his fledging bank debuts on Business Today's Best Banks survey at #8 is just one of them. Business has grown an astonishing 334.6 per cent from Rs 1,497.38 crore to Rs 6,508.27 crore, post-tax profits have risen by over 75 per cent from Rs 44.95 crore to Rs 78.73 crore and the growth in share of total deposits has been 1,285.4 per cent. Sure, the growth figures are on a low base, but that doesn't take away the sheen from the bank's performance.

Dressed in regulation banker grey trousers, white shirt and paisley tie, Kotak admits setting up a bank is "a hell of a job" and a lot harder than it looks, but the good news is that the first year's success has only strengthened Kotak Mahindra's resolve. "All energies are towards setting up a 100-branch network by the year 2007," says the Vice Chairman, a network that will give it a larger presence than any foreign bank in the country. Astute readers would immediately have picked up something in Kotak's apparently innocuous statement, which signals a change in direction: subtle yet perceptible.

Since it was launched on March 22, 2003, Kotak Mahindra stood out for not being a bank in a hurry. No aggressive deposit mobilisation targets, no whistle-stop expansion tours, no overnight mushrooming of ATMs. Not even the expected publicity blitzkrieg. Instead, the Vice Chairman and senior managers took great pains to emphasise the bank's innovative and non-traditional business model. Modelled on European banks, Kotak planned to meet every investment need of a customer, from plain vanilla banking to personal loans to mutual funds to insurance to securities trading. Or as Gupta puts it: "The business model works through first roping in customers by offering them great investment advice and then work on expanding their wallet share."

However, that was last year, a time when interest rates were headed southwards. Today with the yield curve firming up, it's clearly time to take another hard look at the "boutique bank" model. Discloses Gupta: "Well, the decision was taken about a month-and-a-half back to push our branch rollout plans into higher gear." Whereas Kotak Mahindra Bank may initially have set a target of 50 branches, overnight (well, almost) it's been doubled to 100. A wider deposit base is crucial in order to borrow cheap (which the bank can then lend at higher rates to make money) and retail deposits, at 4.5-5 per cent, are still amongst the cheapest sources of funds around. Opines Sailav Kaji, Banking Analyst, Pioneer Intermediaries: "While activities like investment banking and broking continue to provide the bulk of revenues, first and foremost the cost of funds have to be kept in check as even a 50 basis point differential makes all the difference to the bottom line." That explains the new-found enthusiasm to expand the branch network. While so far that may have just meant having signature offices in prime locations, today even more functional properties will do.

Kotak Mahindra has 26 branches (the Vice Chairman makes it a point to personally attend the opening of the first branch in every city) and along with wooing new customers, it's trying hard to "convert" its 5,00,000-strong customer base-spread over its traditional non-banking finance areas like stock broking, car finance and insurance-into full-fledged banking clients. By leveraging its 20-year-old pedigree in financial services, Kotak feels he is in a better position to offer wider, deeper and innovative products to customers.

"The model works through first roping in customers by offering them great investment advice and then expanding their wallet share" Dipak Gupta/Executive Director/Kotak Mahindra Bank

Nurturing corporate relationships is what Kotak Mahindra veteran Shanti Ekambaram-with nine years of investment banking experience-does best. "Banking is as old as sliced bread, and it's only by providing a winning combination of value-added services and commodity products that the boundaries of the franchise created over the years can be pushed," voices Ekambaram who, as Group Head (Corporate and Institutional Banking), is a part of the core team working on pooling synergies within the various arms of the group. Currently she sees a great opportunity in fast growing companies with turnovers between Rs 50 crore and Rs 500 crore.

On the ninth floor of the company's headquarters, a red-eyed C. Jayaram is about to embark on another gruelling international business trip. This time it's the Middle East. Executive Director and head of the newly formed Wealth Management division, the former stock market whiz today supervises 80 relationship managers across nine offices. Their brief is to meet every conceivable investment need of the 2,000-odd clients, each with a net worth of Rs 5 crore-plus. "You start off with a detailed risk profile, tailor-make a solution and end up offering products across a variety of asset classes," says Jayaram, outlining his team's modus operandi. Akin to what private bankers are doing very successfully internationally, Kotak Mahindra says it'll soon start offering advice not just on stocks and bonds, but also on real estate, art and estate planning.

While banking purists may balk at the thought of offering advice on art, reality is that in the coming years, it's these specialised services that will be the clincher. Too new (and small) to compete with traditional commercial bank giants like ICICI Bank and SBI, Kotak Mahindra is relying on some lateral thinking to get around its handicaps. Like the problem of reach. Well aware of the futility of competing on sheer numbers when it comes to ATMs, Kotak customers have the option of using any bank's visa ATM, free of charge. ATMs, or otherwise delivery channels, have always been important to Uday Kotak who says he's inspired by Domino's Pizza's 30-minute delivery model.

Delivery channels like ATMs were important to Uday Kotak, who was inspired by Domino's 30-minute delivery model

Kotak also offers a home banking service, through which cash is delivered at the doorstep absolutely free. Similarly, demand drafts and cheques are also picked up and delivered. A tie-up with service providers Les Concierges also ensures that customers who fall in the "mass affluent" bracket, or with a household income of over Rs 4.5 lakh per annum, can book cinema or theatre tickets and even order flowers or cakes from home.

Targets are many for the non-banking finance company (NBFC) turned bank turned financial services "supermarket". For instance, the current and savings account mix, which currently hovers around 32 per cent, ideally needs to be boosted to 40 per cent. Non-fund based income, which today contributes 39 per cent to the top-line, could also do with a hike. Then there is the question of the promoter holding of 60 per cent. As per Reserve Bank of India regulations, this needs to be brought down to 49 per cent, gradually. The 2.75 per cent stake divestment to Warburg was the first step.

However, what has really Kotak and his A-team really foxed-and one they are publicly willing to talk about-is not so much garnering fresh deposits, as something closer home: retaining talent. "You can never underestimate the challenge of attracting and retaining good people," says Kotak who's seen the bank's strength swell from 1,500 to over 4,000 in barely 18 months.

Kotak's found one long-term investor. Now he's zeroing in on long-term customers. And of course equally long-term employees.