Shishir Asthana Moneycontrol Research
In less than 15 years since Kotak Mahindra Bank converted to a bank from a non-banking financial institution (NBFC), it has managed to do what no other bank could. In terms of market capitalisation, Kotak Bank has overtaken India’s largest bank by branches and turnover, State Bank of India (SBI), and is now the second most-valuable bank. This holds many important lessons for investors.
But before we compare the two banks we need to understand that it is not an apple-to-apple comparison. Kotak Bank in its current avatar has been in existence since 2003 while SBI has been around in its present form since 1955. Before this, it existed in various forms, going back all the way to the early 19th century.
Kotak Bank is still a young bank. With around Rs 3.20 lakh crore in assets and Rs 1.96 lakh crore in advances the bank is largely a personal banking focused bank with only 30 percent of the book coming from corporate banking. This does not really compare with SBI’s deposit base of Rs 26.5 lakh crore and Rs 20.3 lakh crore of non-food credit.
However, for the market what matters is an entity that makes money efficiently. Size and reach of the bank are of little help if the bank is not making money. The market has always rewarded businesses that make money. Kotak Bank is presently making money hand over fist as compared to SBI.
As compared to net interest margin (NIM) of around 2.45 percent for SBI, Kotak Bank has a NIM of 4.2 percent, nearly twice of the state-owned bank. What this means is that for every rupee lent by the banks, SBI makes merely half of what Kotak Bank does. In essence, Kotak Bank runs a much tighter ship.
Various reasons can be attributed to Kotak Bank’s high margin business such as the cost of funds, the business mix between corporate and personal banking and use of technology.
But SBI, because of its size, has the potential to report very strong numbers once the NPA issue is sorted out. Further, the bank has many subsidiaries, the value of which are in various stages of being unlocked. The SBI valuation shooting ahead of Kotak Bank in the future is a strong possibility.
The real story lies not in Kotak Bank’s market cap exceeding that of SBI but in its overtaking of fellow private sector banks bigger in terms of advances and number of branches.
While the details of Kotak Bank and SBI’s financials have been in public domain what the market seems to be factoring in is that Kotak Bank is best suited to exploit the space vacated by ICICI Bank. While the bad publicity around ICICI Bank may not have affected its business, there’s no question that sentiment has taken a beating. Rating agencies have already raised questions about corporate governance in the bank.
A red flag from the rating agencies can scare away investors; the best alternative for investors is Kotak Bank. Axis Bank, too, is in the midst of various issues and may not attract funds till the issues are cleared. While ICICI Bank is trading at a discount of 20 percent from its peak, Axis Bank is 15 percent away from the top. Kotak Bank, on the other hand, is touching new highs.
Many funds still prefer to invest in private sector banks, under such a scenario the only option left is Kotak Bank. Like with Prime Minister Modi in national politics, it seems to be a case of There is No Alternative (TINA).
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