Suave, entrepreneurial, and according to his CV a man who "also plays sitar", Uday Kotak announced this week that he has converted his financial services empire into a bank. This breaks new ground in India. Built up from a brokerage in the 1980s and partnering with local conglomerate Mahindra & Mahindra, the empire has grown rapidly in recent years to encompass investment banking, insurance, mutual funds and auto financing. Now as a bank - named Kotak Mahindra Bank - it looks likely to grow even faster, and will consider acquisitions. Here Uday Kotak explains his strategy:
What does your conversion from a financial services company into a bank mean, and why is it important for India?
Let me first give you a sense of history. This is the first time ever in India that an existing company has converted itself into a banking company. On March 22, one fine day, we became a bank. The reason why it is different? We are passionate financial services people and we are already in a number of areas of financial services. We have insurance, we have mutual funds, we have investment banking, we have brokerage and we have auto financing. Therefore, we are a holistic financial services solutions company. Ultimately, my conclusion is the whole thing is about trust. In the Indian context in particular there is an association between a bank and public trust.
The process of getting approvals must have taken quite a long time?
It started two years ago when the Reserve Bank set out guidelines for potential candidates that wanted to set up a banking company. We applied. Within 10 months we got an in principle approval and a one year timeframe to satisfy a whole host of their requirements. We completed this in February.
Is it fair to say that the bank as it stands right now is quite small?
We are not a stand-alone bank. We are a holistic financial solutions company. The banking platform enables us to give banking solutions and services to an existing customer base. We start with an existing customer base of half a million people who are already our customers through auto financing, insurance and mutual funds. We were among the larger retail non-bank financials anyway.
You will now open 50 branches?
We start with 50 existing branches. But as to stand-alone high street bank branches, we propose to add 75 over three years.
Will you also grow through acquisition?
We are open to acquisitions. It makes sense to look at them, and particularly if you want to build distribution. It's something we will consider seriously. But acquisitions also come with their baggage. You have people and culture issues, and issues about the quality of assets.
IDBI Bank is rumoured to be up for grabs and your name is associated with it.
Yes, that's what I read in the newspaper too.
Another bank which may be interesting as a target would be UTI Bank, which you already have an ATM sharing relationship with.
We would certainly be open to looking at these opportunities.
What does the new structure mean for your relationship with Goldman Sachs?
If you look at all our joint ventures, they are now all subsidiaries of the parent, which is now the bank. And we have two JVs with Goldman Sachs, which continue as 75/25% joint ventures. We have a joint venture with Old Mutual in the life insurance business, and of course with Ford Credit in auto finance. We are happy to continue these relationships which we have built over a long period of time.
Your personal holding in the bank is about 55%?
My family and I own 55%.
Is this the only bank in India that is owned by an individual?
There are individuals in other private sector banks, although I am not sure about percentages. In a sense, I am more comfortable in this situation because there is a complete congruence of the interests of owners and management.
In countries like Malaysia, the central bank has been quite keen to avoid having individuals owning banks. Does the Indian government not have similar concerns?
In our case there is a restriction. We're supposed to dilute our stake down to 49%. That is a commitment we have made to the central bank. When we dilute our stake we can do so via organic and inorganic options. And the other interesting aspect is when our stake reaches 49% the central bank has said that equity will be locked up for a period of five years.
I have been with this institution for many years and I am very comfortable making a long term commitment.
This move suggests you are pretty optimistic about the Indian financial services industry?
I am. You just need to look at some pretty important realities. A management guru recently made a statement that most of the world's major multinationals will have three parts. Manufacturing will move to China. The services, outsourcing piece will move to India. Looking at India and the number of jobs being created in software processing, and the aspirational class of individuals being created, they all have financial savings that need to be intermediated.
You are more optimistic clearly about financial services than investment banking. The latter business is clearly very tough in India?
My view is that financial services is a product package of which investment banking is a part.
India appears to be overbanked on the investment banking front and the fees on privatization work seem to reflect that.
True. Although in privatization we have worked on the buyside with some very big global names, and they can pay better fees.
How do you foresee the process of privatizing the public sector banks developing?
I don't see any privatizations in this area happening in the next 24 months. Beyond that I think the government will look hard at how to handle the public sector banking system. There could be challenges for the system as a whole and opportunities for micro-players.
What's your outlook on India's growth? Are you bullish?
India is reasonably contra-cyclical. We don't feel as gloomy as what we see in the rest of the world. We feel pretty good. Obviously there are concerns about Iraq and everything else. But we feel we are chugging away.
The Indian stock market is trading at very low multiples and has been down three years in a row. That dynamic has led to low valuations and a drop off in new equity issuance. How long will it take for the Indian investor to regain confidence in the stock market?
We are now seeing a significant number of companies being differentiated from the 7000 listed companies. There are 50-70 companies out there that are building trust through fair management. As these companies earning trust, and are trading at reasonable valuations, that is when equities will come back.
What percentage of your business comes from consumer versus corporate?
The ratio is two to one in favour of consumer.
Are you becoming a more interesting stock for institutional investors?
Institutional ownership of our company has increased in the last few years from 2-3% to 10% and is growing.
Do you feel added responsibility now as the head of a bank?
I feel as if I am at the beginning of my career. I like to say we are 20 year old new bank. It's exciting.
