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Kotak Mahindra Bank
Lacks organizational experience in commercial banking: The key driver of
Kotak’s earnings growth will be balance sheet expansion – Kotak is expected to
grow at unprecedented levels. Though the bank (in its earlier avatar as an NBFC) has
long-standing experience in retail lending, it’s relatively inexperienced in corporate
lending. This is a potential risk to long-term asset quality.
Disruptive competition in the capital markets business: Though Kotak has
successfully transformed from a more capital market-driven business model to more
secular lending business, Kotak still derives ~20% of its profits from capital market
business where profit growth has been sluggish. Market volumes have improved but
competition is impacting market share in the broking business and yields in the
investment banking business. New entrants setting up India presence for their equity
business would also lead to disruptive competition.
Excess capital in subs could be an ROE drag: Kotak has significant amounts of
excess capital (25% of consolidated capital) in its securities and IB subs.
Transferring these to the parent has tax implications, and there is thus a risk that it
could lie underutilized in the medium term, and be a drag on ROEs.
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