Kotak Mahindra bank

Kotak Mahindra Bank 

An unconventional road to becoming one of India’s top lenders

As one of India’s top private banks, Kotak Mahindra Bank has had an unconventional start.  

Compared with established peers, it is a relatively new entrant into India’s banking sector. In 2003, the Kotak Mahindra Group’s flagship company, Kotak Mahindra Finance, received a banking licence from the Reserve Bank of India. It became the first non-banking finance company in the country to convert into a full-service private sector bank with good asset quality and a relatively low level of non-performing loans. Today, there are over 1,300 branches across India where Kotak provides a comprehensive portfolio of products and services such as working capital financing, transaction banking, debt capital markets, forex and treasury services.  

Kotak is well-positioned in an industry that offers higher growth potential than most markets in Asia, given the low levels of financial penetration in India. For its part, the Indian banking sector had for years been saddled with bad debt that needed to be tackled to spur lending in a growing economy – the Reserve Bank of India and the government in recent years have taken various measures to clean up balance sheets of lenders and consolidate the weaker public sector banks. That has allowed top private lenders like Kotak, with strong fundamentals, to step up provisioning and collectively gain a greater share of corporate loans from the state-owned banks.  

We like Kotak because of its strong current account savings account (CASA) franchise, credit quality, capital and core fees, and exceptional risk management capabilities. The lender has solid financials, superior cash generation ability, and it is led by a capable and experienced management team that is exceptionally disciplined. For example, at the onset of the Covid-19 pandemic, Kotak was early in pulling back on lending as it saw potential credit risks due to the widespread economic disruption. Having stayed away from riskier lending and shored up its balance sheet, the management is now more confident to start lending again as green shoots of recovery have emerged. Kotak also plans to grow its customer franchise in non-credit risk areas such as advisory, insurance, securities and wealth management.  

Furthermore, Kotak has excellent environmental, social and governance (ESG) credentials. In April, MSCI upgraded the lender’s rating from A to AA, driven largely by an assessment of the bank’s loan portfolio where exposure to environmentally sensitive industries was only about 10%. MSCI noted that Kotak leads industry peers on consumer protection and superior governance practices due to the presence of a majority independent board as well as separate CEO and chairman roles.  

Kotak has also instituted an ESG policy framework to evaluate credit and portfolio composition and align its business strategy, processes and disclosures with national and international standards. It has also demonstrated strong efforts to mitigate risks associated with potential unethical corporate behaviour, with regular audits of its ethic controls and robust policies against money laundering.   

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.