ValuePickr Forum

Kotak Mahindra Bank - Low Cost Liability Banking Franchise

@atul1082: Thanks for your POV.

The guy has built the institute from scratch and aspires to catapult it in the top league. UK says below in one of his AR letter’s which seems a reasonable point:


NPA details for top 4 private banks is as below. Besides NPA, I also collected data for write-off and Debt Restructuring.
Source is RBI website-!4.


I did more data crunching and sharing with all for comments/feedback. Started with 18 Private Sector banks and filtered to focus on 6 using the below logic-

Among the 6, IDBI was filtered out due to huge NPA % as shown below -

In the last 5 banks, a comparative look-refer below picture- at ROE, ROA, NIM and Debt Restructuring makes one thing clear that AXIS and ICICI can be studied further if one has an approach to investing with the basic tenet as ‘Reversal to Mean’ while other 3 - HDFC, Kotak, and Indusind- can be studied for consistency and long term play.

Finally, the CAR of all the banks looks as shown below-

And the deep dive still continues…


Few more thoughts-

KMB’s earnings are suppressed.

  • As of now, P&L has a cost of almost 1400 Cr. as the bank is offering Savings rates of around 5.37% to build the low cost and stable liability while competitors are offering the same at around 3.5%~4% (Q2FY20 Transcript). Moreover, debt restructuring is avoided and bad loans are bucketed under NPA, which hits the P&L in two aspects- More provisions and no accrued earnings from bad loans.

KMB’s ROE is suppressed.

  • Due to suppressed earnings and least leverage among the top 5 banks.

Other Key Aspects:

  • A seasoned jockey at the helm who has a runway for another 7~10 years
  • Business shifting to private banks from public sector banks
  • A strong balance sheet to cherry-pick either NPA’s from other banks or complimentary banks as and when industry consolidates
  • Under Banking three businesses in Retail, Wholesale and NBFC and Under Non-banking other complimentary businesses such as Asset management, Insurance, Security Trading and Advisory cover the entire value chain of an individual or corporate.

Is that the reason market has always valued KMB so highly?

Disc: Not invested. However, impressed. Still working to find the bear case. Do help :flushed:


Some more data.Other Income for HDFC is increasing while KMB is volatile



@atul1082 & @PRSAUDAG:
RBI and Kotak Saga- An interesting read-

@Hao-ming: UK’s view on Dividend-

For us all, Evolution, Adaptation and Survival story of KMB:

Disc: Still Learning about the business. No investment in KMB.

As per my thesis, KMB has the potential to grow at a rate of 25% for the next 5 years. Why?

  • Lower base-Size of BS as well as Advances- as compared to top 4 banks
  • All the top managers are from operations background with customer know-how as they have played various roles across the business verticals. Some of the verticals were started by them from ground zero.
  • Uday Kotak, MD & CEO as well as the founder of the business, is leading the business for 33 Years. He started the business with bill discounting to take advantage of the huge gap between deposit and lending rates dominant in the banking industry in 1985, with 3 people and 30 lakh capital from family and friends. Over the time period, other parts of the business under the group’s umbrella were added. His knowledge and passion for the business stands out in public interactions such as interviews, conference calls. Considering his long term focus on building a bank of future, and the solid team that he has built and retained from the last 20 odd years, I categorize him as a Lion Manager. Considering his stake of 50,000+ Cr in the business in the form of stock ownership- his stock ownership in the business is almost 30% but will be reduced to 26% by Aug-2020 due to RBI’s directive. Also, from Apr 01, 2020 his voting rights will be capped to 15% even though holding will be 26%. UK cannot buy any more shares with voting rights unless his holding falls below 15%.- as compared to his annual salary of 3.5 Cr., I expect him to be an active manager for the next 7~9 Years during which he would continue to nurture the business with a long term focus.

Valuation aspect for an Investor who aspires to earn 15% from his positions looks as below:

If an investor buys the equity at a P/B ranging from 1 ~3, he/she is most likely ( 75% to 100% chances) able to earn his/her expected IRR.

Disc: Waiting for Mr. Market to push the offer in my Sweet Spot before I swing the bat.


Following guiding philosophies of the business leader- UK- caught my attention while exploring various interviews, AR’s and Conference Calls as they point to the INFINITE Game plan.

  • I think about the journey as a train without a destination. and I am a great believer that the fun is in the journey, not the destination.
  • When we make people superstars we forget the sweat, pain, toil, passion, and purpose which has gone into building them. People succeed because there is passion and purpose and they do not care about accolades, they just want to be good at what they are. That is the pleasure of anything you do in life.
  • Prudence, Simplicity and Humility
  • The Most Preferred Employer in Financial Services
  • The Most Trusted Financial Services Company
  • Value creation rather than size alone will be our business driver.
  • Our four mantras; low cost and sustainable deposits and building of the liability franchise and take risks but must get disproportionate returns for the risk. Knowledge, skill and franchise businesses matter and digital is our present and future.
  • Build businesses to last
  • In banking, Balance sheet matters more than P&L
  • Focus on Risk-adjusted returns. Being in a highly leveraged business, do not take equity-type risks while doing lending to earn debt type returns.
  • Think Long-Term and book the pain immediately via P&L

There were talks about Uday Kotak reducing the promoter holding to 26% to comply RBI rules. This one is new though, they have come up with FPO and QIP to issue new shares. What are your thoughts? Will this dilute the equity?

Board_Meeting_Intimation_for_Fund_Raising.pdf (489.9 KB)

As mentioned earlier, UK’s stock ownership in the business is almost 30% but must be reduced to 26% by Aug-2020 as per RBI’s directive.The announcement seems to be the step in that direction.

QIP does lead to Equity Dilution. 15%+ new equity will be issued by the company in case only QIP is done in order to bring down promoters stake from 30% to 26%. Raising money via QIP is preferred as the same is faster, reliable and less cumbersome. Money goes to the company.

FPO: Considering the purpose of the exercise, I understand that it will be of Non-Dilutive nature. Promoter will sell his existing 4% shares to other shareholders. Money goes to the seller/promoter.

Let’s wait and watch. Rest time will tell.

Here is what the BOSS has to say, a snapshot from Conference Call Q2FY17, on BSS Microfinance:


Kotak also worried about Microfinance exposure

So Kotak seems to have sold 9.50% of the shares they were allotted at Rs 10 within the first 15 days. Selling price has to be around Rs 30 which was the market price around that time.

Meanwhile Yes Bank is now seeking to raise more capital to support its balance sheet.

Nothing illegal I suppose but is it ethical in the strictest sense of the word?

If yes then why didn’t the other banks also sell.

Disc- No investment in Kotak

^^“Yes Bank shares traded at anywhere between a low of Rs 22 and a high of Rs 87 between March 17 and March 31. Simply put, this means the three banks that sold stake during this period could have made anywhere between 2X to 8X gains on their investment of Rs 10 per share.”

Your figure of RS 87/- seems incorrect. PL recheck

It was intraday high (18/03/2020)

Can kotak sustain such high p/b given that growth is a question mark - additionally the ROE on the bank has historically been low (sub 15% for past 5 years). Quality should ideally be backed by good return ratios as well (for comparison hdfc bank has roe of 18% for past 5 years) while both have similar sales growth ~20% for past 5 years
Hdfc bank trades at 3x pb, while kotak trades at 4x
UBS too recently downgraded the stock to sell

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Please go through this post:

Apart from this,RoE is lower for Kotak because they have lower leverage,if you look at the RoA(return on assets) that is around the 2% mark with HDFC bank being a shade lower.

On growth,that is not a Kotak specific issue,you will see that across the sector,however very few have the capacity to suffer and thus have the ability to not only survive but thrive when the environment improves a few quarters down the line.


Given what I’ve observed about KMB since posting this and also gotten a somewhat better understanding of how KMB is being run in the past few months, below factors helps me understand the valuation difference with HDFCB

  1. Substantial hidden profits with lower savings account interest rate (something which was mentioned earlier as well but KMB has aggressively reduced SB interest from 5-6% to 3.75-4.5% in 2-3 months)

  2. Stable Leadership for next 10 years - Uday Kotak is around 60 years old and still has 10 years to go before reaching RBI age limit for MDs/CEO. HDFC Bank’s new MD/CEO announcement is imminent and it can drastically change (up/down both) market’s views on the bank

  3. Conservative lending and debt / equity - KMB is levered 5x whereas HDFCB is levered 7x, in economic downturns like the current one - this should definitely help the bank cope better with upcoming stress.

Their conservativeness is somewhat borne out with below as well:
On a personal note, I hold about 10 different credit cards and Kotak Mahindra was the first to send this message (3rd April) and actually hardly any other banks have shown this:

“Considering the current environment, as a preventive measure, we have temporarily suspended the Cash Withdrawal, Personal Loan on Credit Card and Balance Transfer facilities with immediate effect on your Kotak Credit Card”

Disc: Invested in KMB


In the results of Kotak Bank i saw their AUM. In that 42% of it was in Debt MF. is that a cause of concern given recent franklin episode. Though their NNPA is comfortable. But what if some of this 42% is in short term or Ultra short term Debt .IS not there a chance of Increase in NPA.

while Going further i saw their major portion of profit comes from Corporate/Wholesale banking(40% revenue,70% profit) again given covid-19 situation if big ticket project go haywire then definitely there will be pain in coming quarters.

In cash flow statement i observed decrease in Advances by 50%. may be conservative approach due to Covid-19.

As of now i am very much comfortable with NPA and performance.

I might be wrong in my analysis being a novice. do enlighten me.

Disclaimer: Invested

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