'We are very capitalised and looking for suitable acquisition'

Uday Kotak, Executive Vice Chairman and Managing Director, Kotak Mahindra Bank looks back at a stellar year for a company that registered 200% jump in Q4 profitability. ET NOW brings you excerpts of the chat.


A special one today Kotak Mahindra Bank, the numbers have come out and a stellar set of numbers for the quarter, for the year a 200% jump in profitability for Q4, a 100% jump in PAT for FY10. The outlook looking rosy as I am told its 25 years that the bank has completed and they have opened 250 branches or will just open the 250th branch, 500 ATMs so it has been a stellar performance by the bank over the last 25 years and the mind boggles to think as to what this institution would do over the next 25 years. It will be a moment of nostalgia when we will talk about that in a bit but 25 years 250 branches the ads are ringing on FM radio stations as well as television screens as well you must be a satisfied man?

Uday Kotak: I think this is a great journey. It was journey in many ways of a reforming India, a developing India and I think about the fact that when we started this company there was hardly any private sector in Indian Financial Services and that is 1985. (Watch)

In 2010, we have seen a very significant structural change in the Indian economy and in the Indian Financial sector and at Kotak we are really happy to see that we have been able to be the beneficiaries of the Indian Financial, reform process and the indian economic growth process and at the end of 25 years which we complete this year we are happy to come to you with a news on the split of our shares which we have just announced today.

A 1:1 split and more importantly a year when we have seen our profit after tax grow 100% to a number of 1307 Crores versus 652 Crores last year. So it has been a good year but we see the outlook for Indian financial sector and Kotak Mahindra Bank into the year ahead even better subject, of course, to the world and whether it is a Lehman or a Greek tragedy not coming in our way.

Alright, we will actually talk about that as well Mr. Kotak we still have opportune time to have you but let's talk about the quarter first, the quarter the year that went by and Kotak Mahindra business per se, the business model and this year the numbers do show that what you have spoken about that is moving on from retail to the non-retail part of the business if something that will be an active strategy and the numbers are reflecting that, would it actually get more skewed as that quarters go by more away from the retail space towards the corporate space?

Uday Kotak: No our mix is retail to wholesale 2:1, so two-thirds of our lending business will continue to be retail and about a third would be wholesale side and the reason for that is we as a bank are very focussed on what we call as risk adjusted net interest margins. If you look at our net interest margins that's 6.3% we continue to be probably the highest in Indian banking and that is reflective of very high focus on risk adjusted returns as deep in the DNA of the firm. (Watch)

In fact that would have been my next question that if indeed the strategy was a lot more towards non retail then would it be difficult to sustain those margins, you say that for the next two quarters may be the year or going ahead as well you would give lot of importance to the 6% mark so on so forth?

Uday Kotak: No, we are not obsessed with 6% but you must keep in mind that we also have the advantage of high earning because of high capital adequacy. On a consolidated basis we are 19% plus on the capital side and therefore the whole story about NIMs also helped by higher capital but going forward, I mean, we think our NIMs has the ability to sustain well above the 5% mark, whether they are at 6% or above is depends on how the book builds.

What about credit growth for the banking system per se and for Kotak Mahindra as a space as well, its probably just starting to show a little bit of an uptick but would you believe that FY11 as a year would be a year of credit growth if you can call it that compared to the kind of growth that we have seen in FY10 even if you take into consider a low base in the previous year?

Uday Kotak: We grew our advances in FY10 by 32% on a consolidated basis. When we look at FY11 our current plan is to grow at about 30% on the FY10 base. So we think that's a decent level of growth on credit which we will achieve in 2010-2011 30% per annum.

Sure, broadly speaking but for the banking space as a whole as well, I am just not asking you to where the Kotak Mahindra had but you are an industry veteran as well you believe FY11 could be the year wherein the credit growth would actually show a bit of an upward trajectory sort of a Jacob effect may be coming in?

Uday Kotak: I think if India was standalone country and did not have any confusions on the rest of the world I would say that India is on a very good growth trajectory but there is external pressures which may take some of the GDP away but as long as the world is not in a crisis but the world may be sluggish or slow I think India is in good shape and I would say that Indian story should continue to flower in the period over next 12 months subject to there being no crisis of the nature which we saw in 2008.

In fact that brings me to a very crucial point. Over the last 6 months I have had countless discussions with corporates and bankers alike wherein corporates have been constantly complaining that bankers haven't been too forth coming in giving out credit note sort to say and bankers have been defending their stand simply because of the risk that was there. Looking at the global situation right now and we will talk about that in a bit in greater detail later on but just looking at how the things are unfolding right now you believe that all that is happening right now will not play a spoilsport assuming that what is happening right now is the worse that can happen?

Uday Kotak: My view is that thanks to what's happening around the world in the Indian context. The RBI probably will go a little slower in terms of hiking interest rates therefore most people were expecting a midterm between two credit policies a hike in interest rates.

My sense is they will wait till the next credit policy before they take a call on that, if Indian policy response is slower increase in interest rates and there is no major crisis then the India story then the India juggernaut will continue to grow. Now it is possible that there may be some impact on exports to Euro zone and others but I still think India should grow at 7.5% to 8% through this year.

You think inflationary concerns if at all can play?

Uday Kotak: To a certain extent if oil is softer and commodities prices are softer that may be the counter point against inflation.

Sure, so you don't believe that there would be at least at the current point of time you don't believe that inflation could raise its ugly head and forced the RBI to probably?

Uday Kotak: My view is by end of this year inflation will be at around 6%.

Oh that note, that says at all. Alright, also talk about the investment banking business of your company and a concern that people have or its probably something that even you would looked at the profitability of that business is not the greatest, it has been but its not the best is there a conscious effort to improve that or you believe the competitive pressure has forced you to probably manage at the current level?

Uday Kotak: First off all we view that in the investment banking space we are significantly improving our competitive positioning. We doing a lot more work, we get lot more calls in from corporate clients to work for them and this is a good sign and in a way we think consolidation has already beginning to happen in the minds of clients so that is good news for investment banking in medium term.

In the short run every player on planet earth is now in India and is trying to nibble away so we are ready to face that competition and if it means some fragmentation and margin pressure for a while as long as we serve clients and get mindshare of these clients we think over time this business will produce the returns and in the short run even if there is some pain on margins we are ready to live with them but continue to be committed deeply to this space, the investment banking space which we think we have a dominant franchise.

So you are reiterating the fact that it will be growth versus the margin picture in the near term for the investment business?

Uday Kotak: Absolutely.

Alright, since you mentioned consolidation one word really and let's finish this rumour once & for all, there is always a talk of you as a company probably looking out to buy make some bit of buyouts in the investment banking space, AMC space.You take?

Uday Kotak: We are open, we are very capitalised, we have a strong capital position therefore we will look at an appropriate acquisition if there is something which make sense but our view is you got to look at acquisitions very carefully and see what is the value that you are getting and if you are convinced there is value go for it but very often you people tend to believe that acquisitions are because it creates hype in the market our view is value over hike is a basis for looking at acquisitions.