Kotak Adds Bank Network to Trump Ambani to DBS: Corporate India

Kotak Adds Bank Network to Trump Ambani to DBS: Corporate India

Billionaire Uday Kotak’s bank plans to double its branch network in the next three years to head off new competitors for India’s $1.2 trillion of bank deposits. Mumbai-based Kotak Mahindra Bank Ltd. (KMB), which has the nation’s highest net interest margins, will open 500 new branches at locations including small towns and villages to shelter itself from the local subsidiaries of foreign banks and new domestic rivals, Chief Financial Officer Jaimin Mukund Bhatt said in a Nov. 12 interview.Competition for the 65 percent of Indians that don’t have a bank account is set to intensify after central bank Governor Raghuram Rajan introduced rules on Nov. 6 removing branch restrictions on overseas lenders that form local units. Companies controlled by billionaires Anil Ambani and Kumar Mangalam Birla have also applied for new bank permits from the Reserve Bank of India.

“We are doing a grab on locations that have potential to grow,” Bhatt said. “With existing banks getting a head start at this, the new entrants who will be looking at setting up branches” will find the going tough, he said.

Kotak Mahindra, which started in 2003, is seeking to add to its 500 branches that held less than 1 percent of the nation’s 73 trillion rupees ($1.2 trillion) of deposits, RBI data show. State Bank of India, the nation’s largest lender by assets, has more than 15,140 branches and controls 16.8 percent of deposits.

State Bank has been adding as many as 1,000 branches every year, A Krishna Kumar, a managing director at the lender, said in an interview on Nov. 15.

‘Accounting Pain’

“Kotak’s management understands that a certain number of brick and mortar branches has to be in place to a build business of meaningful size,” said Vishal Narnolia, Mumbai-based banking analyst at SMC Global Securities Ltd. said by phone. “While there will be a lag on profitability in short term they are willing to overlook that accounting pain.”

Shares of Kotak Mahindra gained 12 percent this year to 725.65 rupees on Nov. 14 making it the best performer on S&P BSE Bankex index, a guage of 13 lenders. Bankex slumped 14 percent during the period. Indian markets were closed for a holiday on Nov. 15.

India’s 20 private lenders including Kotak Mahindra accounted for 19 percent of the nation’s outstanding loans as of March 31, RBI data show. The country’s 26 state-run banks held 76 percent, while 43 foreign banks accounted for the rest.

The RBI said on Nov.6 it will allow the locally incorporated units of overseas banks including Standard Chartered Plc (2888) and Citigroup Inc. (C) to open branches “anywhere in the country at par with Indian banks.” Previously hamstrung by regulations that have limited new foreign branches to 12 a year, New York-based Citigroup and London-based HSBC Holdings Plc haven’t won approval for a new outlet since 2009.

Loans to Individuals

DBS Group Holdings Ltd. (DBS), Southeast Asia’s largest bank, will open at least 50 branches in India within three years after the rules are eased, Vijit Yadav, chief operating officer of the lender’s Indian operations, said in an Oct. 7 interview. The Singapore-based bank has opened 12 offices since 1995 and is planning to grow its loans to individuals and small businesses in India, Yadav said.

Competition for the existing Indian lenders will increase further as the RBI issues new banking permits to more companies in the South Asian nation.

A panel formed by the central bank is examining the applications from companies vying for the permit, Rajan said on Sept. 4, without giving a deadline for providing license. The permits will be given in January, Finance Minister P. Chidambaram said in a speech on Nov. 15.

‘Brick & Mortar’

Banks in India should open atleast one-fourth of their total branches in unbanked villages which do not have a “brick and mortar structure” of any lender, according to a Sept. 19 e-mailed statement from the RBI. The lender will also have to open at least half of their new branches outside large cities.

“There is a rush among banks to find these unbanked villages on the peripheries of reasonably prosperous towns,” said Bhatt. “You need to be smart in identifying it as every single bank in the country is trying to do it. If you manage to do a good grab, as the town expands geographically, this branch will become a part of it.”

More branches in rural areas will help Prime Minister Manmohan Singh’s government to tap savings in rural areas and accelerate gross domestic product, which Goldman Sachs Group Inc. projects to grow at 4 percent for the year ending March 31, the weakest pace in more than a decade. Only 35 percent of India’s adult population has accounts with banks against a global average of 50 percent, according to the World Bank.

Borrowed Money

Kotak Mahindra’s net income grew by more than 25 percent, the slowest pace in at least four quarters, in three months to Sept. 30 on treasury losses, data compiled by Bloomberg show. State Bank of India reported a 35 percent fall in profit in the same period as bad loans rose, exchange filings show.

“Profitability at Indian banks will remain under pressure atleast till the end of the financial year,” Hatim Broachwala, Mumbai-based banking analyst at Karvy Stock Broking Ltd. said by phone. “The investments by banks in expanding network may remain a drag on profitability for an extended period if slump in economy continues.”

Kotak set up Kotak Capital Management Finance using 3 million rupees he borrowed from friends and family members who ran a cotton-trading business. He formed a partnership with Goldman Sachs Group Inc. in 1995. In 2006, Kotak paid 3.3 billion rupees to buy out the 25 percent stakes that the New York-based firm held in the investment banking and securities businesses.

Acquisition Plan

Kotak Mahindra is now considering acquiring a lender to expand its branch network, Bhatt said. Kotak and his family own about 44 percent of the lender, which has a market value of 558 billion rupees, data compiled by Bloomberg show.

The bank’s net interest margin, a measure of lending profitability rose to 4.9 percent in the three months to Sept. 30 from 4.6 percent a year earlier, an exchange filing shows. The lender’s capital adequacy ratio according to the so-called Basel III norms improved to 18.1 percent from 14.9 percent.

“Each new branch may take three to four years to break even,” Bhatt said. “But this is an investment we have to make.”

To contact the reporter on this story: Anto Antony in Mumbai at aantony1@bloomberg.net