Kotak Mahindra Bank on Monday surpassed India’s largest lender State Bank of India (SBI) in market value to become the second most valued lender in India after HDFC Bank. This attests to not just excellence at Kotak but to the resilience of investor confidence in Indian banking.
Kotak’s market capitalisation rose to Rs 2.23 lakh crore, Rs 0.01 lakh crore higher than SBI’s. This shows the virtue of integrity and strong leadership in a relatively young bank. Its steady performance over rate cycles, improvement in business growth and stability in asset quality have helped. Corporate lending accounts for about 30% of the bank’s book. So, this private bank has not cherry-picked safe borrowers to achieve its success. The bank has created value by courting risk integral to lending to the industry.
The net interest margin of Kotak Mahindra Bank, at around 4.2%, is 70% higher than that of SBI (2.45%). Size or reach alone does not matter when it comes to giving investors a bang for the buck. Significantly, Kotak Mahindra Bank has also outperformed its peers in the private sector. Reportedly, an HDFC Securities note in January this year had said that the bank had proven its competitive edge over its private sector peers with higher fee income, superior asset quality management and effective management of financial business arms. “Looking ahead, we expect strong traction in earnings to continue owing to robust growth in loan book, moderate credit cost and healthy margins,” it had said.
Last week, Nomura said that the time was ripe for KotakMahindra Bank to buy Axis Bank, and the former would gain liability and retail asset size enough to rub shoulders with HDFC Bank. Kotak is an outlier at a time public confidence in the banking system has been shaken, with state-owned banks hobbled by bad loans and high-profile private sector banks mired in controversies. Banks should move away from lending to long-gestation infrastructure projects that must be funded by bond markets. Structural and governance reforms are needed for banks to go the Kotak way. May we have more Kotaks and may SBI make that a tough task.
via Kotak Bank’s rise: Deserts of Diligence