The last few years have been seen significant activities in the banking industry. It all began with the GOI decision to grant more banking license to bring up competition and as well take banking more to the rural/ under banked/ un-banked areas of the country. The understanding was that there is enough space in the economy for many more banks to succeed. But what started with a huge fanfare with lots of aspirants for the universal license ended in a pretty damp squib when RBI just awarded 2 entities for universal licensing. IDFC and Bandhan were the fortunate ones. Both have gone live very recently and we have to wait for a couple of years to get a perspective on how well they have succeeded in their initial strategy. With this as background it will be quite interesting to have a perspective on how the last 2 awardees of banking license, namely Yes Bank and Kotak Mahindra Bank (KMB), have performed till date. The economic background has changed from 2003/2004 to 2014/2015 but what has more changed is the innovation in banking and digital technology space. Hence the perspectives from Yes & KMB will be interesting to have, but one should be cautious to directly correlate it to expected future performance of IDFC/ Bandhan.
The analysis will be interesting to watch for 2 key reasons:
- Understanding how 2 banks have grown from scratch (Yes Bank, while KMB converted from NBFC to bank) in recent past and what it may hold up for the latest set of licensees
- Yes & KMB started with different customer focus/ strategy and the choices at that time has shaped their initial performance and for same reasons both of them had done moderated their strategy down the years. More as we go deeper
BTW, we will keep our analysis limited to FY15. The reason is that KMB bought out ING Vysya bank in India and the same got incorporated into KMB from April 2015. Hence FY16 comparison between KMB & Yes will not be on similar terms and will lack justification.
So to start with, let’s first understand broadly on their strategies they started with and how they modified it down the line.
Key points to note are that:
- While Yes Bank started with a Corporate centric business model (95% CIB business), KMB started with significant focus on retail (80% retail)
- Down the years, Yes Bank re-strategized and started to focus on retail as well (you can see the savings interest rate competition). They are now more 20-25% retail
- Similarly KMB also re-strategized to balance between retail & corporate and as you can see in Mr. Kotak’s comments, by FY11/12 they were at 40% corporate in advances and they want to have retail limited to 60-65%.
Here pls. note that there are a few basic key performance metrics that gets impacted by the above choices:
- Corporate advances are high value ticket sizes but of much lower volume. Operating cost of a corporate focus bank is lesser as per advance cost is much lower than retail, which are low ticket higher volume and consumes more operating cost
- Between the bank & the customer, the power equilibrium changes considerably depending on whether we are talking about a corporate customer or a retail one. All said & done on retail customer experience, the buying power is more with corporate customer. Corporate can negotiate hard on interest rates and that can put a drag on Net Interest Margin for the bank. The same is not so significant for a retail bank whose loan rates are more driven by RBI repo rates and it’s need to raise funds/ availability of deposits
- Hence typically cost to income for a corporate customer is lesser, but NIM is also lesser (impacting revenue) and so is CASA
The first 3 charts reflect the individual bank growth strategy:
Chart #1: Branch growth story reflects their growth strategy. Retail bank (KMB) will focus more on branch additions compared to a corporate centric bank (Yes Bank). Hence KMB takes an early lead but then one can see a spike for Yes Bank, in FY12-13, reflecting their new found focus on retail customers from that year (refer to the growth strategy chart). BY FY15 end, they are quite close!
Chart #2: CASA strategy similarly shows the impact of their strategy. KMB, which started with a more retail focus, shows higher CASA % but Yes Bank, has been steadily improving its own ratio. The advantage of higher CASA is lower cost of deposit and helps in retaining a higher NIM
Chart #3: The business focus of each of these two banks comes out very clearly in this chart. As expected, Yes Bank starts with a very high number with a significant tapering down in later years while KMB shows a much more gradual rise down the years
Chart 4 & 5 reflects the growth of Deposit base & the Advances for each of these banks (All figures are in INR Billion – 1Billion = 10 Crore). Yes Bank shows higher deposits and advances compared to KMB, despite lower number of branches. This is not an anomaly but a reflection of their strategy. Since Yes Bank is more corporate focus, the growth is not as correlated to number of branches which is more relevant for KMB, which is more retail focus. Also though Yes Bank has lower CASA, it would be drawing its deposit primarily from Term Deposits & other corporate deposits.
Chart 6: This provides an income comparison. Income includes Net Interest Income (Interest income from Advances/ Loans – Interest expense from Deposits) and ‘Other Income’ which would also include fees & commissions from distribution of 3rd party products, service charges earned by bank etc. Currently many banks in India are focusing increasingly on ‘fee income’ as their NIMs have been mostly under strain due to increase in deposit rates and lower than expected credit growth. As explained earlier, KMB shows higher Total Income despite lower ‘Other Income’ because it could work out a higher NIM from retail than what Yes Bank can command from corporate customers.
Chart #7: Quite interestingly, the situation is not so clear while comparing ‘Profit Before Tax’ (primarily Total Income – Interest Expense – Operating Expense) between the two. Since Yes Bank can command a lower operating cost because of its corporate focus, but at the same time KMB can command higher NIM income from retail focus. Hence its mixed baggage. While KMB clearly shows higher profit (pls. note that KMB also had much higher branches in initial days and hence it is not exactly comparable), Yes Bank seems to have done better in last 2 years.
Chart 8 & 9 are per branch Income & PBT comparison which again primarily reiterates what we have been discussing earlier. KMB shows higher income because of stronger NIM while Yes Bank ends up with a higher branch PBT by virtue of lower cost of operation.
Before concluding it is important to note that the above is a basic comparison and there are quite a few more important parameters for comparing bank, such as ROA, cost to income etc.
Hope you have found this analysis useful & interesting. Pls. be cautioned that there are multiple other reasons which are also playing role in individual bank’s performance (for e.g. performance of the sectors they have primarily invested in etc). Nonetheless, the banks started with a core strategy which both of them had to revisit somewhere down the line. For Yes Bank, it was not only to lower cost of funds but also to de-risk its model as individual corporate demand for loans can suddenly change and also there can be major implication for the bank, if one big corporate switches its allegiance completely. For KMB, a more balanced approach means a higher profit margin. On a closer look, one can find that FY12 & 13 are years where KMB seems to have outperformed Yes Bank with a higher Income per branch and a higher PBT per branch as well.
Coming to the recently launched 2 new banks, IDFC bank and Bandhan bank have different backgrounds. While IDFC had been primarily an investment/ project financing entity, Bandhan had been a well known MFI catering to priority sector segment in Eastern part of the country. But as they have morphed to ‘bank’, IDFC has been focusing on ‘Bharat’/ financial inclusion segment as well, while Bandhan bank branches have been reaching out to salaried/ middle class customers as well. Will there be any midcourse correction / change in strategy? Only time will tell!
Let’s sit back and watch this space for more insights as first set of numbers starts trickling in. Also we will have the Payment banks and the Small finance banks getting ready to go live by sometime next year. Hence keep watching for more at randomwalks.in!
Source: KMB & Yes Bank Annual reports, investor presentation and other publicly available reports/ news items. While we have taken utmost care in ensuring that the data is correct and picked from authentic sources, we will be happy if you reach out to firstname.lastname@example.org to report any data issues/ inaccuracy etc.