“Think Investments. Think Kotak”

Benoy Paul Jose CBS.BFS.033

2/24/2010

Corporate Strategy Dossier.

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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 customer’s 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 group’s 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 man’s 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. Kotak’s 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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� 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 want to be.

� 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.

Where they are.

� 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...

How they get there.

KMBL - Strategies

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Industry Analysis

KSF’s 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 gamut’s 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 JV’s 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

A bank will have to acquire capital from sources like fixed deposits, savings

accounts, term deposits etc... Thus formed capital is given out as lending’s (loans).

This is their source of income.

Procurement: Strategic sourcing, Vendor Selection.

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

programs.

Product R&D, Technology, Systems Development:

- CRM, Operational efficiencies, market expansion, Emerging Markets, Competitive

positioning.

- KMBL’s IT support has been awarded for their innovative security measures and user

friendly software.

Supporting A

ctivities & Costs

External factor:

- Funding/Capital

structure.

- Regulatory

Agencies.

- Clearing partners.

- Alliance partners.

Operations:

- Deposit services.

- Loans.

- Treasury.

- Item processing.

- Payment

processing.

Distribution:

- Branch/ATM

networks.

- Internet.

- Calling officers.

- Phone banking.

- Call centre.

- Mails.

-

Sales &

Marketing:

Branding, Deposit

gathering, New

Account acquisition,

Cross Sales, Fee

revenue generation.

Revenue Streams

- Banking Products.

- Insurance/Investm

ent products.

- Business services.

- Treasury services.

- Wealth

management.

-

Pri

ma

ry A

ctiv

ity

& C

ost

s

Profit Margin

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

Compliance.

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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.

The figure shows that KMBL lies in the development sector of the industry and the

industry as such comes in between growth and development.

Development

Growth

Maturity

Decline

Indian banking

industry

KMBL

Time

Output

Industry Life Cycle

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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 India’s 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 Bank’s 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 Bank’s 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 MFI’s, 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 NPA’s 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

NPA’s from the retail segment. the excess fund was diverted to corporate

lending.

9. SME lending’s-

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 bank’s 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 Bank’s 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,

NGO’s 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 lending’s 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