Today we´ll talk about Kotak Mahindra Bank we´ll talk about their business model , financials and valuation
History of kotak Mahindra bank
Let´s start with their history . As you may know. Mr. Uday Kotak is the managing director and he started this company His family was into trading cotton and other agricultural commodities and for some time , he actually worked with them as well but he didn´t like it so much because there were too many family members involved After finishing his studies , he decided to start a financial consultancy . You might be wondering why did he want to do that.
Mr. Uday Kotak used to visit a brokers office , which was in the stock exchange building with one of his professors He was always interested in numbers and he used to see how the markets work and this is where he got the idea of financial consultancy Now that you know how he started , let me explain how they started making money At that time , if a big company wanted to borrow money , they would have to pay 17 % interest rate and Mr. Uday Kotak saw an opportunity here One of his classmates joined a Tata Company called Nelco.
Nelco used to borrow money for 90 days at 17 % interest rate Mr. Uday Kotak offered money to Nelco at a slightly lower interest rate even though they agreed , Mr. Uday Kotak still didn´t have the money to lend it to Nelco He approached his friends and family members and offered them 12 % interest rate on their money as they were only getting 6 & on their fixed deposits He was able to raise money at 12 % interest rate and then lend it for slightly lower than 17 % and this is how the business started He kept doing the same process with several another companies and this is how he met Mr. Anand Mahindra from Mahindra group At that time , when Mr. Uday Kotak visited USA , he hat noticed that big banks such as Goldman Sachs and JP Morgan carry their family names .
This is very important because he realised that people will only do business with you if they trust you The logic at the initial stage is that you use your family name first because you put your reputation to risk to build trust. In those days , they were not a name in the financial services. and this is when they considered Mahindra group because it was very famous Mr. Anand Mahindra did invest in the company.
he agreed and this is where the name Kotak Mahindra bank comes from It´s important to know that they got their banking license in 2003. Before getting banking license, they also started their car loan business. Those days, only Citibank did car loans and the lending rate was 27% and it was a profitable business at that time , even though many people wanted to buy cars , there was always a waiting list and it took 6 – 8 months for delivery They started buying cars and booking cars in advance and whenever a customer wanted a car, they could give a car and the finance and this is how they competed with Citibank . and once they got their banking license , they kept growing their business .
They also have several joint ventures Fo example , they partnered with Ford for car financing and Goldman to do investment banking There is one important point here. They never gave anyone part of Kotak Mahindra Bank they started creating subsidiaries for these joint ventures as Mr. Uday Kotak always knew that the joint venture will eventually end and that´s why they started subsidiaries and once their parters decided to exit , they just bought them out and if you take a look now , they own all of their subsidiaries.
Management of kotak Mahindra bank
let´s talk about their management. As I mentioned , Uday kotak is the managing director of this company In 2019 , his salary was only 3.2 crores and the company made 7 204 crores of profit , which is very low We already know the reason behind that and that´s because he has a very big stake in the company already and in Jan ,
RBI ordered him to decrease his shareholding by 4 % to 26 % in 6 months I would like to share one point. If you take a took at their team members , many of them have been in the same bank for a very long time For example , the joint managing director , Mr. Dipak Gupta , has been there since 1992 . Chief operating officer of Prime has been in the same bank since 1996 , which is a very good sign .
Business model of kotak Mahindra Bank
Now let´s talk about their business model and I will cover their subsidiaries as well 68 % of their profit after tax comes from Kotak Mahindra Bank . As it´s a bank , the majority of their income is interest income. 30 % of their loan book is corporate loans and this is where they give loans to big companies.
They started growing this business aggressively after 2009 as many of their competitors exited this segment completely after the financial crisis Kotak Mahindra Bank thought that they can compensate a slightly higher risk with high interest rates In 2019 , 30 % of their total loan book was corporate. Many people find corporate business very risky but that´s not entirely true.
The majority of their loans are short term as they find it less risky plus the majority of their loans are secured and this means , there is always a collateral included just like in home loans . The second category is consumer , which is 36 % of their total loan book , which is for retail customers They have two categories here. The first one is Home loans and LAP and this is 20 % of their book and 16 % is personal and credit card loans .
As I mentioned earlier, this is a very flexible bank and they adjust to the situation by decreasing their exposure in risky segments Overall , you will always see growth in their advances but if you take a closer look , you will always see many changes For example , in 2008 , Kotak bank felt that the unsecured personal loans are very risky in the next 2 years , they decreased their exposure by more than 50 % at the same time , they started growing their corporate book as I mentioned and the last category is commercial , which is 32 % of their loan book and it focuses on rural and urban areas 13 % of that 32 % is agriculture division , which includes crop loans 10 % is commercial vehicles and 9 % is business banking they also have a very small category , which is only 2 % and this is others As you may already know , a bank also makes money from fees and services and in the case of Kotak bank , 25 – 30 % of their income comes from this category let´s take a look at their subsidiaries now.
The first one is Prime , which was started in 1996 and it contributes 8 % to their profit after tax Around 72 % or advances to towards car loans but they also give corporate loans They also help car dealers finance their business You might be wondering why do they operate separately if they can give car loans with Kotak Mahindra bank That´s because they believe that it´s better when a subsidiary focuses on only one thing As you can see , their profit has been growing nicely as the auto sector isn´t performing well ,
the growth is not so much you can also look at the Net NPA , which I will explain later but I jsut want you to know , that it´s less than 0.4 % The second subsidiary is Kotak Mahindra life insurance , which contributes 7 % to their profit after tax They also offer general insurance but that segment is not profitable yet.
IN this segment , they offer you traditional and ULIP´s. As you can see , it´s very profitable and the growth is very nice Next subsidiary is Kotak securities and it contributes 6 % to their profit after tax and this is very profitable because once you invest in all the infrastructure needed , the rest of the money goes directly to your profits but their market share isn´t very high .
As you may know , they earn a small fee when you or me buy shares through them but they also make money through futures and options and this product is very profitable fro the broking business but Kotak Mahindra bank doesn´t want to focus on that at the moment so they only make money when you or me buy shares through them
As you can see , it´s a very profitable business and they have been growing moderately Next subsidiary is Kotak Mahindra AMC and it contributes 4 % to their PAT. They have been increasing their market share and in 2019 , they had more than 1.3 lakh crores in assets under management. compared to 1.1 lakh crores in 2018 and it´s a profitable segment next subsidiary is Kotak Mahindra investments , which contributes 3 % to their PAT and it focuses on real estate One example is construction finance for residential and commercial projects Next subsidiary is international business and this contributes 2 % to their PAT They operate in UK, Singapore, USA and they are engaged in various activities such as fund management and advisory services investments,
and the last category is Others , which contributes 2 % to their profit and this includes microfinance and Kotak Mahindra Capital , which is full service investment bank They helped Infosys with their buyback .
Subsidiaries of kotak Mahindra Bank
Now you know everything about their subsidiaries but we still need to see how good the bank is and for that , we take a look at some metrics The first one is CASA ratio . As you may know , banks don´t have their own money so first they have to borrow money in order to lend it later to their clients Let´s imagine that they borrow money at 5 % interest rate and they lend it at 10 % interest rate ,
they get a 5 % margin but if they manage to borrow at 4 % instead of 5 % and still lend it at 10 % , now their margin is 6 % that´s why we always want the bank to borrow money at the lower interest rate possible and that´s why we check the CASA ratio CASA stands for current and savings account .
As they have to pay very little interest on it , we want this ratio to be as high as possible and we compare this with the total deposits In this case , the bank´s CASA ratio is 52 % and it has been growing rapidly in 2015 , it was only 36 % but now it´s 52 % and in the last year itself , savings account grew by 38 % So how are they able to grow this so rapidly because if you think about it , every bank offers you current and savings account In 2011 , RBI de-regulated the interest rate offered on savings account and Kotak bank took advantage of this Unlike the rest that were offering 4 % , Kotak bank started offering 6 % on savings account and this is the main reason behind their growth As a customer ,
this is perfect because they can get a higher interest rate but if Kotak bank is offering you 6 % interest rate , this also means that it´s a big expense for them if HDFC Bank offers you 4 % and Kotak offers you 6 % , this additional 2 % is also a big expense for this bank The biggest expense of a bank is interest expense and this is costing them extra 1 000 crores.
despite offering higher interest rate , their margins are still very good. Let´s imagine that I offer you a loan at 10 % interest rate and I borrow that money at % interest rate the spread in between is known as Net interest margin or NIM and in this case , it was 5 % In the last 5 years , Kotak bank had a NIM of more than 4 % , which is very good and the last metric is NPA or non performing assets. Many times , when a bank gives a loan , it might not be able to recover it back If you can´t recover the money in 90 days ,
we call it NPA because it´s not performing for you . This is always seen as percentage but let´s imagine that a bank has NPA of 100 crores according to regulations , the bank has to keep some money aside for safety and this is known as provisions So we have 100 crores of NPA and bank created provisions of 50 crores , we are left with 50 crores , which is known as Net NPA and this will be seen as percentage as well compared to total loans. You can see in the case of Kotak bank , it has always been under 1 % Which is a good sign as I always mention except 2017 ,
when it was 1.1 % I would like to mention something . I´m sure you must have realised that the Net NPA of HDFC Bank is very low when you compare it with Kotak but there is a reason behind it. Kotak bank is very transparent with their Net NPA . For example , I mentioned that if you don´t recover the money in 90 days , it will be known as NPA but RBI has allowed banks to recognise NPA´s if there is an inherent weakness in the account and Kotak bank does it Let me give you another example . If the bank thinks that some accounts can become NPA´s , they will disclose it .
Basically , you might see high numbers but you can believe those numbers I will give one last example. RBI studied the NPA´s of various banks . They found out that Yes bank had disclosed a certain amount of NPA but the actual number was even higher. The difference between RBI and Yes bank´s number is known as divergence. In the case of Yes bank , in 2017 , the divergence was more than 6 000 cores and it was slightly more than 2 000 crores with HDFC Bank In the case of Kotak bank ,
the divergence was 0 . Now , let´s take a look at their financials. As it´s a financial company , I won´t talk about the balance sheet and cash flows that´s because their business model is different and they depend on borrowings. As they keep borrowing , you see a very high number of borrowings but it´s normal that´s why we will focus on the income statement As you can see , last 5 year performance has been very good . Revenue has been growing by more than 20 % Interestingly , their profit has been growing at 23 % , while revenue has been growing at 20 % So how can a company grow profit more than the revenue ? That´s because they are controlling their costs We can check this by cost to income ratio .
This helps us understand the cost they have to incur to achieve that income In 2015 , their cost to income ratio was 52 % but in 2019 , it became 47 % . This means that their cost is decreasing. as their cost keeps decreasing , their margins improve automatically Now , let´s take a look at their valuation. As you may know , there have been several changes in the banking industry due to current scenario . There are three main points. The interest rate has been decreased. Why is this so important ? If banks can borrow at a lower interest rate ,
they will offer you loans at a lower interest rate If before they were borrowing money at 5 % and then lending for 10 % , they had a 5 % margin but if now they can borrow at 4 % and they want to have 5 % margin , they can give you the loan at 9 % this is the main reason behind lower interest rate as they want people to take loans and spend this money If you have any type of loan such as credit card or personal loan , you don´t have to pay your instalments for three months but this point is confusing because people think,
they won´t have to pay instalments for three years and that´s not true your loan will get extended for three months and at the end , you will be paying these three months as well RBI allowed banks to do this but this doesn´t mean that banks will do it but as you know , banks have to answer their investors , so they are trying to recover as much money as possible so not many banks are applying this three month period relief because they have to answer their investors every quarter and the third point is CRR or cash reserve ratio.
A bank always has to keep some money with RBI for safety please note that we have CRR and SLR but in this video , I will only talk about CRR In this case , banks had to keep 4 % with RBI in the form of CRR but the bank doesn´t make any money on this Now RBI has decreased this CRR from 4 % to 3 % . So now banks get access to this 1 % extra cash . With one move , RBI gave banks more access to capital .
As banks are keeping 1 % lower CRR with RBI , now they have extra capital but extra pressure as well banks will only make money when they actually lend this 1 % to their clients basically , banks will only make money with this money if they give you loans but it´s pressure because now everyone has capital and they will be competing. At the end , banks will start offering you loans at a lower interest rate This is perfect for the consumer and that´s exactly what they want.
They want consumers to take loan and spend it so we can keep the economy moving and that´s why they made so many changes Kotak bank has mentioned that if the situation lasts for a very short time , the economy will recover nicely but if it lasts for many months , then it will take a very long time to recover plus they might not be able to recover money from several clients especially their microfinance segment as small companies are struggling a lot but once the situation improves , will Kotak be able to perform well or not ?
If we want the bank to grow , it needs to have capital and for this , we take a look at the capital adequacy ratio . It basically helps us understand the amount of capital the bank has . When a bank gives a loan , certain loans are riskier than others. Capital adequacy ratio helps us understand the amount of capital the bank has according to risk weighted assets This is seen as percentage and in the case of Kotak bank , in the last three yers , it has been more than 17 % , which means that they have a lot of capital
You want this number to be higher than 11 – 12 % and 17 % is very good it´s also very high in the case of HDFC Bank and this means that these banks have enough cash to grow in the future Kotak bank will perform well but I do find their valuation bit expensive Of course , they will do well and they are very flexible as I mentioned , after 2009 , they decreased their personal loans but they started increasing corporate loans but I do find it bit expensive If you would like to see the stocks