The stock market may be on a roll and banking stocks may be on fire fuelled by the strong growth in the economy. But small investors have pretty much stayed away from the party, hurting players like Kotak Mahindra Bank that runs a fairly big brokerage business. Nevertheless, India?s fourth-largest private sector lender has done well to grow its consolidated bottom line by 92% in 2009-10 to Rs 1,231 crore. Dipak Gupta, executive director, tells Saikat Das and Shobhana Subramanian that with the loan book growing at 30% plus, future profits should be far less dependent on the capital market.
Since retail investors aren?t really in the market, there must be a lull in the broking business…
Yes, retail flows are not strong, whether it is into mutual funds or directly into the market though overall volumes both in the cash and F&O segments have increased. Most of the action is in the F&O space where the yields are very, very low. The way we see it is we will be in the capital markets business; it?s a space we understand well. But as the lending business grows, the share of the retail broking business will come off. So, in times when the broking business does well our yields will see a spike, at other times, it won?t.
The share of profits from the flow businesses?namely brokerage, AMC and investment banking?has already come off to around 25% of consolidated profit at the end of June 2010 from around 60% eight quarters back.
The share of mortgages and corporate loans has risen to 60% at end June 2010 from 40% at end June 2009. How do you see the loan mix going forward?
The corporate and mortgage segments are easy to grow as ticket sizes are large and expand with time so it takes fewer transactions to grow the business. It helps that home loans, which account for 16% of our retail portfolio, are of a longer tenure so one doesn?t need to be constantly looking for fresh assets. Two years back, the retail to non-retail loan mix was around 80:20. But during the downturn, we saw huge pressure on retail assets, and high rise in delinquencies, especially the unsecured category. So we started focusing on corporates and today the mix is a far healthier 66:34 and should stay at these levels.
Since you are not a large bank, how do you compete in the corporate banking space?
We made a breakthrough with some of the larger companies, especially PSUs, during the last downturn when other banks were not lending to them. We realised many SMEs were in trouble and so we shifted focus because the spreads that loans to large companies fetched us at the time were very good. So we managed to move into several consortia and subsequently grew our exposure. We may not have had strong lending relationships but Kotak has always been a strong investment bank and we leveraged that. Also, we?re not chasing long-term loans and while we may not be able to lend Rs 500 crore to a company, we can always syndicate the Rs 500 crore by selling down the loan and those spreads can be fairly large. For example, two years back KMB was the biggest lender to Shriram Transport but actually we never provided more than Rs 100 crore; the idea is to originate and distribute. We also earn from forex transactions and LCs and we?re big time into cash management, which only a few banks offer. The advantage of cash management is that money moves through you, and when that happens, some amount remains with you.
You have an advantage in the retail space because of the broking business…
Yes, our retail model is a strong one. It?s easier for us to grow the retail book because of our cross-selling opportunities through group companies and the high retail exposure leaves us with yields of 13% that are higher than what the competition earns. Historically, we have been retail-focused but we took a backseat two years back when the trouble started; we found that people with loan amounts of Rs 1 lakh and Rs 2 lakh were in deep trouble. Again, as a bank, we don?t allow for much of an asset-liability mismatch. The gap would not be more than 3-4 months because the average duration of our liabilities is 9-10 months and that of our assets is 14-15 months. We are in something of a sweet spot when it comes to growing the loan book because our base is low and there is enough opportunity.
If you?re going to stay as highly profitable as you are, don?t you need to grow your CASA?
Although we may have only 265 branches, our cost of funds is actually not so high. And although our core CASA may be about 28%, it?s effectively higher at 37-38% because we run an interesting product called an auto sweep. What happens is that money from the savings account gets swept into term deposits but the cost to the bank doesn?t go up too much; if the money moves out in seven days, we pay nothing. Close to 55% of our funding is still wholesale, which is cheaper than retail; we borrow from the CD market, which costs roughly 50 bps less than retail money. Within CASA, we hope to grow the current accounts rather than the savings accounts as we have better products and technology and our ?core? CASA should grow to 40%. Today our weighted average cost of funds is in the range 5.5-6% and this is one of the reasons we earn a relatively high net interest margin of 5.5%-plus. We are so profitable is because our yields are so high.
KMB?s operating expenses per branch are high?
That?s because we focus on mass affluent plus customers and servicing them is more expensive. The ratio of relationship managers to customers at our branches would be higher than that for peers. The other reason is that we?re setting up new branches and it takes typically takes 3-4 years for a branch to break even. The cost of setting up a branch today is anywhere between Rs 50-75 lakh. Our cost to income ratio, therefore, is a high 50-51% while it is in the low 40s for others. This year, for instance, we will set up about 65-70 new branches and costs will taper off when new branches become a smaller proportion of the network. We plan to have 300-320 branches by the end of 2011 and 500 by December 2012, by which time we should also set up 750 ATMs.
What worries you?
At this point of time, the worry is actually the life insurance piece because there?s so much uncertainty in the industry. It?s unlikely that sales of ULIPs will increase too much in the new scenario and there also isn?t going to be any great demand for traditional products. So, going forward, I need to cut costs because if I don?t do that the profits that I have been earning?a combination of income arising out of insurance, asset management and surrender charges?cannot sustain. The income from surrender penalties, in fact, is gone and so I need to cut down on branches and salespeople. But then, productivity in the marketplace will not suddenly go up because insurance is, after all, a push product. Also, the economics of traditional products is very different from that of ULIPs; the capital requirements are higher while the profits that I make as an insurance company are lower. Basically, on the life insurance side, all of us have to go back to the drawing board and start thinking afresh. What will I sell? How will I distribute? It?s easy to say your distribution margins have to be cut because the allocation available is less. But since there is a cap on charges now, either I take on the cost or the distributor does. But then again, the distributor is not just selling my product so he will take the best deal that he gets. The short-term pain could be huge.