Corporate Strategy Dossier.

Think Investments. Think Kotak

Benoy Paul Jose

CBS.BFS.033
2/24/2010
 Vision

The global Indian financial services brand-

Our customers will enjoy the benefits of dealing with a global Indian brand that best
understands their needs and delivers customised pragmatic solutions across
multiple platforms. We will be a world class Indian financial services group. Our
technology and best practices will be benchmarked along international lines while
our understanding of customers will be uniquely Indian. We will be more than a
repository of our customers' savings. We, the Group, will be a single window to
every financial service in a customers universe.

The most preferred employer in financial services-

A culture of empowerment and a spirit of enterprise attracts bright minds with an

entrepreneurial streak to join us and stay with us. Working with a home-grown,
professionally-managed company, which has partnerships with international
leaders, gives our people a perspective that is universal as well as unique.

The most trusted financial services company-

We will create an ethos of trust across all our constituents. Adhering to high
standards of compliance and corporate governance will be an integral part of
building trust.

Value creation-

Value creation rather than size alone will be our business driver.

Three defining qualities of Bank of the future

Simplicity
Humility
Prudence

Significance of the groups logo

The symbol of the infinite Ka reflects our global

Indian personality. The Ka is uniquely Indian while
its curve forms the infinity sign, which is universal.
One of the basic tenets of economists is that mans
needs are unlimited. The Infinite Ka symbolises
that we have infinite number of ways to meet those
needs.

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 Kotak Mahindra Group
Kotak Mahindra is one of India's leading financial organizations, offering a wide
range of financial services that encompass every sphere of life. From commercial
banking, to stock broking, to mutual funds, to life insurance, to investment banking,
the group caters to the diverse financial needs of individuals and corporates.

The Kotak Mahindra Group was born in 1985 as Kotak Capital Management Finance
Limited. This company was promoted by Uday Kotak, Sidney A. Pinto and Kotak &
Company. Industrialists Harish Mahindra and Anand Mahindra took a stake in
1986, and that's when the company changed its name to Kotak Mahindra Finance
Limited.

The group has a net worth of over Rs. 7,500 crore and has a distribution network of
branches, franchisees, representative offices and satellite offices across cities and
towns in India and offices in New York, London, San Francisco, Dubai, Mauritius
and Singapore. The Group services around 6.7 million customer accounts.

The journey so far

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 Key group companies and their businesses

Kotak Mahindra Bank-

The Kotak Mahindra Group's flagship company, Kotak Mahindra Finance Ltd which
was established in 1985, was converted into a bank- Kotak Mahindra Bank Ltd in
March 2003 becoming the first Indian company to convert into a Bank. Its banking
operations offer a central platform for customer relationships across the group's
various businesses. The bank has presence in Commercial Vehicles, Retail Finance,
Corporate Banking, Treasury and Housing Finance.

Kotak Mahindra Capital Company-

Kotak Mahindra Capital Company Limited (KMCC) is India's premier Investment

Bank. KMCC's core business areas include Equity Issuances, Mergers &
Acquisitions, Structured Finance and Advisory Services.

Kotak Securities-

Kotak Securities Ltd. is one of India's largest brokerage and securities distribution
houses. Over the years, Kotak Securities has been one of the leading investment
broking houses catering to the needs of both institutional and non-institutional
investor categories with presence all over the country through franchisees and
coordinators. Kotak Securities Ltd. offers online and offline services based on well-
researched expertise and financial products to non-institutional investors.

Kotak Mahindra Prime-

Kotak Mahindra Prime Limited (KMP) (formerly known as Kotak Mahindra Primus
Limited) has been formed with the objective of financing the retail and wholesale

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trade of passenger and multi utility vehicles in India. KMP offers customers retail
finance for both new as well as used cars and wholesale finance to dealers in the
automobile trade.

Kotak Mahindra Asset Management Company-

Kotak Mahindra Asset Management Company Kotak Mahindra Asset Management

Company (KMAMC), a subsidiary of Kotak Mahindra Bank, is the asset manager for
Kotak Mahindra Mutual Fund (KMMF). KMMF manages funds in excess of Rs
20,800 crore and offers schemes catering to investors with varying risk-return
profiles. It was the first fund house in the country to launch a dedicated gilt scheme
investing only in government securities.

Kotak Mahindra Old Mutual Life Insurance Limited-

Kotak Mahindra Old Mutual Life Insurance Limited is a joint venture between Kotak
Mahindra Bank Ltd. and Old Mutual plc. Kotak Life Insurance helps customers to
take important financial decisions at every stage in life by offering them a wide
range of innovative life insurance products, to make them financially independent.

Kotak's International Business-

With a presence outside India since 1994, the international subsidiaries of Kotak
Mahindra Bank Ltd. operating through offices in London, New York, Dubai, San
Francisco, Singapore and Mauritius specialize in providing asset management
services to specialist overseas investors seeking to invest into India. The offerings are
differentiated India investment solutions that span all major asset classes including
listed equity, private equity and real estate. The subsidiaries also lead manage and
underwrite international issuances of securities. Kotaks international arm is
positioned for managing assets in the Indian Capital markets.

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 Group Structure

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 Kotak Mahindra Bank Ltd (KMBL)

Kotak Mahindra Bank Ltd, is one of the prominent subsidiaries of Kotak Mahindra
group. The activities of the company being parallel to its objective are very wide and
cover all the components of a Bank. The Basic area of Operations is the Banking
business, other products are meant for the regular revenue generation.

KMBL offer complete solutions that address a wide range of financial requirements,
both for individuals as well as for institutions. From everyday banking to long term
investments their offering covers it all.

The Bank offers comprehensive business solutions that include Trade Services, Cash
Management Service and Credit facilities. It has over 245 branches spread across 141
locations in the country offering both traditional banking products and investment
advisory services.

Apart from traditional facilities like deposits accounts, savings account, current
account, term deposits, personal loans, home loans the bank has spread its wing in
the investment services by providing its customer facilities like Demat, mutual fund
and insurance. The bank has also opted for net banking, mobile banking and phone
banking for convenience of its customers.

Within a small span of 6 years, the bank has spread it wings in several sphere of
finances. Presently, spread in 82 cities in India, the bank caters to the needs of its 5.9
million customers spread throughout the length and breadth of country and even
abroad. By the end of FY 2008-2009, the Kotak Mahindra Bank had about 220
branches spread all over the country.

The Bank has a high Capital Adequacy Ratio (CAR). The CAR as at 31st March 2009
was 19.86% with Tier I being 16.01%. The CAR under Basel II was 20.01% with Tier I
being 16.13%. At a consolidated level the CAR is 22.84% under Basel I. There were
almost no Tier II lendings. The Net NPA of the bank at the year end 2008-09 stood at
2.02%.

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 KMBL - Strategies

Where they want to be.

Mission
- To be a world class Indian
financial services group.
- To be the most preferred employer
in the financial services.
- To be the most trusted financial
company.
- Value based growth.

Defining Qualities
- Simplicity
- Humility
- Prudence

Where they are.

Numerous awards for Kotak

Investment Banking - Best
Investment Bank in India in 2008.

Kotak Mahindra Bank rated Best
Workplaces in India 2008 (study by
The Great Places to Work Institute
India).

Kotak Investment Banking & Kotak
Securities jointly awarded Best
Equity House in India by Asiamoney
in 2008.

Presence in 6 major overseas cities.

How they get there.

Value driven management

Professional service

Technological innovations
- User friendly online banking
service.
- Mobile banking, SMS banking.

All under one roof
- Wide range of banking/financial
products.
- One account for multi- usage;
Demat, Fixed Deposit, Term
Deposit, Mutual funds etc...
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 Industry Analysis
KSFs of Kotak Mahindra Bank Ltd.-
 Efficient promoters.
The promoter of KMBL, Mr.Uday Kotak has a good credibility in the
industry. The board of directors of KMBL are prominent personalities
from the Indian financial segments. They have a wide and in-depth
knowledge of the industry as well as individual segments.

 Key alliances.
 Employee friendly.
 Customer friendly service.
 Efficient utilisation of technology.
 Strong presence in different gamuts of financial services.

Competition-

Although KMBL is a new entrant in the Indian Banking industry, they have come up
with a stupendous growth. However, the booming Indian economy has attracted
investments from across the globe, especially in the financial segment. This has led
to many mergers and JVs in the Indian banking segment. The entry of foreign banks
has also increased the competition.

The main competitors for KMBL are:

1. YES BANK Ltd.

The YES BANK Ltd, founded by Rana Kapoor, is creating ripples in the
private banking segment. Although they were only in the wholesale and
corporate banking service, lately they have entered the retail banking as well.
They have huge expansion plans in pipeline. From the private banks in India,
YES BANK is a potential major competitor for KMBL.

2. Other Indian private banks which could be possible competitors Axis Bank,
HDFC Bank and ICICI Bank.

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 3. State Bank of India
The State Bank of India has a wide presence throughout India. They have the
largest retail customer base in India. The volume driven business of SBI is a
major threat in the retail segment for KMBL. However, the technologically
efficient and superior KMBL can attract new generation clients more than the
SBI.
4. Foreign Banks
Standard chartered bank.

Current Attractiveness-

The Kotak group has its presence in almost every aspect of the financial services in
India. All these business are highly correlated. The group has its presence in
commercial banking, stock/commodities broking, mutual funds, life insurance,
investment banking, financing services etc...
The mutual support of these businesses would give KMBL a higher bargaining
power than any other Bank in India. The new generation customers are risk takers,
and they look for investment opportunities to grow their wealth.
KMBL directly has numerous investment avenues on offer for the clients. This
would help the customers have better access to securitisation and have a good
spread in their investment portfolio.
The efficient management also makes KMBL very attractive.
The Indian retail banking segment is still in a growth stage and the KMBL has many
expansion plans in the pipeline.
The regulatory measures from the RBI/SEBI may be a hurdle on the road. However,
the management of KMBL has led the bank with high ethical values and foresight.
All these factors make Kotak Mahindra Bank Ltd. investment attractive.

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 Industry Value Chain

Profit Margin

External factor: Operations: Distribution: Sales & Revenue Streams

Primary Activity & Costs

Marketing:
- Funding/Capital - Deposit services. - Branch/ATM - Banking Products.
structure. - Loans. networks. Branding, Deposit - Insurance/Investm
- Regulatory - Treasury. - Internet. gathering, New ent products.
Agencies. - Item processing. - Calling officers. Account acquisition, - Business services.
- Clearing partners. - Payment - Phone banking. Cross Sales, Fee - Treasury services.
- Alliance partners. processing. - Call centre. revenue generation. - Wealth
- Mails. management.
- -

Strategic Decisions: Strategic Planning, Risk management, Asset/Liability management,

Supporting Activities & Costs

Compliance.
Product R&D, Technology, Systems Development:
- CRM, Operational efficiencies, market expansion, Emerging Markets, Competitive
positioning.
- KMBLs IT support has been awarded for their innovative security measures and user
friendly software.

Human Resource Management: Recruiting, Training, Performance Management, Incentive

programs.

Procurement: Strategic sourcing, Vendor Selection.

A bank will have to acquire capital from sources like fixed deposits, savings
accounts, term deposits etc... Thus formed capital is given out as lendings (loans).
This is their source of income.

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 Future Industry outlook
The Indian banking industry has a huge growth potential. There are many players
coming for a share of the pie. This has prompted the RBI and other regulatory bodies
to come up with more stringent regulations. Transparency would be emphasised
more. The banks have to get themselves ready for these changes. The recent moves
by the RBI like implementing a Base Rate in place of BPLR, making KYC norms
stricter etc... have long term implications in the operations of the banks.

The following figure shows the Industry Life Cycle of Banking Industry in India, as
well as that of KMBL.

Industry Life Cycle

Indian banking
Output

industry

Maturity

Decline
KMBL Growth

Development

Time

The figure shows that KMBL lies in the development sector of the industry and the
industry as such comes in between growth and development.

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 Organizational Strengths

Strengths-
 Efficient management.
 Access to different financial products/services within the Kotak group.
 Good employee relations.
 Good capital adequacy. (23%)
 Low NPA of 2.02% compared to industry (private banks) average of 3.51%.
 Presence in foreign soil.

Opportunities-

 Being part of the Indias growth story

 Utilise the emerging opportunity of getting the wallet share of the burgeoning
middle class
 Utilise technology to provide solutions to customers
 Increase distribution strength

Threats-

 Volatile environment
 Fiscal deficit
 Volatile interest rate movements
 Competition

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Corporate Governance-

The Bank believes in adopting and adhering to the best standards of corporate
governance to all the stakeholders. The Banks corporate governance is, therefore
based on the following principles:

o Appropriate composition, size of the Board and commitment to

adequately discharge its responsibilities and duties.
o Transparency and independence in the functions of the Board.
o Independent verification and assured integrity of financial reporting.
o Adequate risk management and Internal Control.
o Protection of shareholders rights and priority for investor relations.
o Timely and accurate disclosure on all matters concerning operations
and performance of the Bank.

The Banks philosophy on corporate governance enshrines the goal of achieving the
highest levels of transparency, accountability and equity in all spheres of its
operations and in all its dealing with the shareholders, employees, the government
and other parties. The Bank understands and respects its fiduciary role and
responsibility to shareholders and strives hard to meet their expectations.

The Bank was ranked among the top five in Corporate Governance Practices in
Asia/Pacific for the year 2009. The Bank has achieved this ranking for the second
year in a row. For the current year, the Bank has been ranked as No 1 in Asia/Pacific
and No 2 in the financial services industry across all the regions covered.

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Corporate Social Responsibility-

Conservation

A bank can conserve more than just financial resources. The annual report is
printed on 100% wood-free environmental-friendly paper. The paper has been
manufactured as per the Siam Pulp and Paper Policy for environmental
conservation and safety, and has been accredited by the Environmental
Management System - ISO 14001.

Through an internal initiative called Kill Bill, the group is pursuing a two-
pronged objective of conserving natural resources (water, paper, electricity, fuel)
while simultaneously cutting costs through operational synergies .

In order to embed this thought process in its culture, there is regular internal
communication on how to reduce global warming, use car pools, maximize fuel
efficiency, conserve water and so on.

Strategies followed

The KMBL follows many innovative strategies so as to bring in synergies between

their businesses as well as with their customers. Some strategic moves by the bank
during the year 2008-09 are discussed below.

1. CASH NET-
This is an alliance between Citibank, Industrial Development Bank of India,
Kotak Mahindra Bank and UTI Bank. It is the country's first independent
shared ATM network. IDBI Bank received permission from the Reserve Bank
(RBI) to serve as the network's settlement bank. Cash net will give access to
more than 1,300 ATMs for more than 6 million debit cardholders of the

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 member banks. The alliance would constitute about a third of the total card
base and 15 percent of the ATM base in the country.
2. Sunday Banking-
Sunday Banking was launched in select branches which cater only to
residential localities.
3. Customer Engagement Program (CEP)-
A formal Customer Engagement Program was started wherein the bank has a
systematic calendar for contacting customers and periodically reviewing their
banking needs.
4. Micro Finance-
Collaborating with Micro Finance Institute's, NGO's and the govt. The entry
via MFIs, NGO and the government helps the Bank to get directly engaged in
this business without direct efforts. The huge microfinance industry in India
will boost the banks earnings; however there is a risk of NPAs to increase.
5. Launch of credit cards
As a bank, this was the missing piece in its product suite. KMBL launched
credit cards in April 2008 with an initial target of 350,000 cards. Due to the
down turn and the recessionary effects there was a threat of people not
paying and so they slowed down dramatically to end the year with just over
100,000 cards.
The Bank took a call to discontinue outsourced acquisition and only source
customers through internal sources or referrals. These measures helped in
limiting the losses, the credit cards are less than 1% of its book.
6. Branch expansion-
The bank increased the number of branches to 217 towards the end of FY 08-
09. Although they went for steady expansion, these were not restricted only to
urban areas. They set up branches in semi-urban areas too. This was a
strategic move, because many of the semi-urban regions in India are emerging
fast and it would also have access to nearby rural areas too.

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 7. Branch banking-
Their initial target was to touch 260 plus branches by the end of the year. The
eventual number was 217. The bank initially slowed down since rentals were
falling really fast and it wanted to get better rates considering most branch
leases are typically signed for nine-year periods. The slowdown call then
continued due to the economic climate.
While the bank continues to grow their branch network, it is worth noting
that 16% of its customers actively use the online banking channel. In a young
country, this number will only increase and the bank is working to make this
channel simpler and more secure to use.
8. Cut on lending-
Since a lot of the problems in the lending business stemmed from the retail
end, the bank placed a greater focus on lending to corporate clients. It brought
down the retail landings from 89% to 80%. This helped them decrease the
NPAs from the retail segment. the excess fund was diverted to corporate
lending.
9. SME lendings-
Among small and medium corporates, the bank worked with companies that
have a track record for raising capital. And among larger corporates, it
worked with large companies (most of whom had raised money at attractive
rates from overseas markets) and PSUs.
In this segment, even though the yield is lower, the customer profile was in
keeping with the banks emphasis on protecting the balance sheet. Besides,
what it may lose in yield is made up through growing the corporate banking
relationship as clients count on us for transaction flows, LCs, guarantees, pay
orders, DDs, transaction fees and so on. In many cases, it goes on to sign up
salary accounts, which helps build depositors.
10. Early exit from FX derivatives-

In October 2007, KMBL decided to stop derivatives. A number of other banks

realized there was a problem only around late January, early February. By
taking an early call, KMBL were able to limit its losses. As a proactive risk

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 management measure the Banks participation in the Securitization markets
were also consciously moderated. These measures helped the bank
considerably in keeping it aloof from the losses due to the downturn.

Conclusion

Kotak Mahindra Bank is positioning themselves as the bank of the future. To

support this vision, the management has ensured they serve the customer of
the future, ie. the young Indians. They also strategically come up with
products and services which this majority share of the customers would be
comfortable with. The heavy dependency on technology and internet is a
substantiates this.

The only void in between their service was the rural population and the
bottom of the pyramid population. To cater this category of the population,
they are strategically gone for partnerships with Micro Finance Institutions,
NGOs and even the government. This way KMBL will have their presence in
this segment with lesser risk and cost.

Even though KMBL has a comparatively lower NPA rate (2.02%) than the
industry itself, those levels are also high. They need to address this issue at
the earliest. Reducing lendings to the retail customers is a short term strategy.
For a longer term, they should come up with products which would cater
both the requirement of the customer as well as reduce the risk of the lending
too.

Thus, on a whole, the bank of the future is playing their cards smartly. They
survived the down turn without much wounds. This proves the ability of the
promoter and the management to guide the bank to a better stronger future.

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References:
http://www.thehindubusinessline.com/2009/11/14/stories/2009111450990400.htm
http://www.kotak.com/Kotak_GroupSite/annual_reports_flash/fy08-
09/main/downloads/kotak-bank/Report%20on%20corporate%20governance.pdf
http://www.kotak.com/Kotak_GroupSite/annual_reports_flash/fy08-09/main/vision.html
http://www.kotak.com/Kotak_GroupSite/aboutus/our_corp.htm
http://www.iloveindia.com/finance/bank/private-banks/kotak-mahindra-bank.html
http://www.rbi.org.in

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