Business Today

A tale of derring duo

Kotak Bank and YES Bank started about the same time and are growing smartly - but with distinct strategies.

Shalini S. Dagar and Rajiv Bhuva         Print Edition: December 26, 2010

They are both towering personalities in the world of finance. One is a professional banker who went on to start a bank; the other is an entrepreneur who founded a financial services firm when in his mid-20s and, 18 years later, his nonbanking finance company, or NBFC, became the first to convert into a bank. The common thread: Both got their banking licences in 2003-04, a few quarters apart.

The journeys of Rana Kapoor's YES Bank, and Uday Kotak's Kotak Mahindra Bank, or KMB, began around at the same time. But the routes could not be more different. YES Bank has positioned itself as a bank for "future businesses of India" - think food and agribusiness, life sciences and renewable energy.

Kotak's model has evolved over the years, starting with car finance and investment banking to include, more recently, private equity, asset reconstruction and even a stake in a commodities exchange.


Rana Kapoor
Bank: YES Bank
Founded in: August 2004
Strategy: Retail and niche knowledge areas on the corporate side such as renewable energy and agriculture
Balance sheet size: Rs 51,796 crore (as of September 2010)
Strengths: Sharp focus, motivated and young team
The destinations are pretty much similar. Kapoor has declared he wants to be the "best quality bank of the world in India" by 2015. And last fortnight he told BT that many of his employees - "at all four levels of our management structure" - are millionaires via stock options. "We will be the Infosys of banking," declares Kapoor. That pride of achievement is visible in Kotak, too. "I am genuinely a believer that we have the best financial model anywhere on earth," he told BT a little over a year ago.

In the BT-KPMG Best Banks rankings, YES Bank is on top of the heap in the mid-size category - banks with a balance sheet size less than Rs50,000 crore as of March 31 and with more than 10 branches. Robust growth in loans and advances, fee income and operating profits helped YES lead the pack. At No. 2 is Kotak, which has also done well on the growth parameter, but falls short on asset quality and productivity and efficiency. When both these banks started, they knew they had to do something different to stand out from the rest of the banking pack. As Dipak Gupta, Executive Director, KMB, points out, the core team had to figure out a way of differentiating the 239th bank in India.

"When we started we knew nothing about banking," says Gupta. "Most of our experience was on the capital markets side." For the first six months after converting into a bank, Kotak had just four branches. "We portrayed ourselves as a bank plus," says Gupta. "But the internal joke was: the plus is visible, but where is the bank?"

For the next few years, not much changed. The traditional strengths that Kotak brought along were retail lending and capital markets advisory. "These were the cores and the differentiation we chased in banking was related to financial advisory," says Gupta. KMB, in the early years, was not too keen on opening traditional savings accounts. "We were keener to open investment accounts," says Gupta. That's how the banking journey began with a focus on retail - but with not too many branches. Till March 2007, KMB had some 105 branches.

The global credit crisis of 2008 pushed KMB to review its strategy. Today, claims Gupta, the bank is visible. "The changed market environment is such that the plus is relatively small now." Businesses other than banking, like asset management, broking and life insurance, formed three-fourths of the business pie in 2004. Those non-banking activities, points out Gupta, have now shrunk to a fourth. KMB today has 278 branches, and 617 ATMs across the country.

Over the past few years, Kotak's profit contributions from the two main capital markets businesses - securities and investment banking - have progressively decreased. And the banking activities have come to the fore in contributing to the bottom line, point out analysts at Macquarie Research in a mid-October report. "The banking business indeed has shown a commendable turnaround, with return on equity improving rapidly," says Suresh Ganapathy, Head of Financial Research at Macquarie Securities Group in the report. From a mere 19 per cent five years ago, banking, along with auto finance, contributes nearly three-fourths to overall profits.

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