#2 Weekly Report: June 1-6

Reading time: Less than 10 minutes.

Uday Kotak sells 2.8% in Kotak Mahindra Bank

In my last post, I explained the rationale behind Kotak Mahindra Bank (KMB) raising capital. As a side note, I also made a clear distinction that KMB raising money was NOT the same as it’s promoter-founder, Uday Kotak, selling his stake, which he finally did. The moolah that he made? A cool ~6900 cr.

While some media outlets have fun guessing which Indian banks Uday Kotak can buy with that money, let us ask the hard questions: Why? Why did Asia’s richest banker reduce his stake in his own bank, by close to 3%?

To understand this, we need to time travel.

Year 2003: RBI hands the coveted banking license to KMB; and they start operations. At that time, the regulation was that promoters must have a minimum of 49% shareholding for a minimum period of five years. Uday Kotak had a bit more than that. All good? No. You see, the thing about regulations is that they’re never static.

Year 2005: RBI issues ‘Guidelines on Ownership and Governance in Private Sector Banks’. What does this notification say? Banks should have a well-diversified ownership rather than having one or a few individuals with voting rights. Why? They think that it will make private banks more institutionalised and will improve the compliance and governance of the banks. Result? “No single entity shall have ownership in excess of 10%…”, wait what? From 49% to 10%? That seems unreasonable.

Year 2013: RBI issues fresh guidelines for new banks. It says,

Promoters will have a minimum of 40% share-holding, locked in for a period of five years and which shall be brought down to 15% within 12 years.

Okay, this makes more sense. So let’s calculate. KMB launched 2003. Adding 12 leads to 2015. Now take note. Uday Kotak still held close to ~45% as of 2012. To bring that down to 15% in 3 years? NOT an easy feat. Why? Just imagine. Mr. Kotak netted ~6900 cr by selling just 3%. So selling 30% is not a joke. What would he do with all that money? Invest in another business? Would shareholders really want that?

I hope you are slowly realizing the difference of opinion among investors/shareholders and the RBI.

Moving on, I’ll let this chart explain what happened post 2013.

Image source: Moneycontrol

This ~30% shareholding stayed like that for a long time. KMB even tried to find a loophole in RBI’s definition of “shareholding” to bring down the stake. But the central bank didn’t budge.

All hell broke loose. KMB dragged the central bank to court (you can do that?), harsh words were exchanged and finally RBI relented. According to this final approval dated Feb 19, 2020, KMB was supposed to reduce the stake to 26%, which as this post began with, has finally been done.

Note: There is yet no clarity about the timeline in which KMB has to bring down the stake to 15%.

Learning: So what did we learn from this entire episode? I can cook up a debate on both sides. But let’s try to understand.

• During the period of existence, RBI had changed the rules quite a few times. Although it was well within its right to do so, sometimes banks grow too big to effectively reduce this stake without moving the markets. Also, in a lot of cases, investors do appreciate promoters having skin in the game.

• KMB, on the other hand, is not The Chosen One. If other banks (IndusInd, YES Bank, Lakshmi Vilas) could do it, couldn’t KMB atleast try?

• Why did RBI relent finally? Does it not set a bad precedent? Why was Bandhan Bank not allowed to open new branches when it did not dilute promoter stake but a similar stringent action was missing in case of KMB?

All important questions. For now, let us congratulate Uday Kotak for his win. And also his new position as the Confederation of Indian Industry (CII) President. I’ll be back again with more updates.

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SBI Net Profit quadruples: Q4 results!

How?

How does a bank have a 327% jump in net profit over a year? From ₹838 cr a year ago to ₹3581 cr today? Despite COVID wreaking havoc everywhere?

Well, the devil is in the details.

This quarter’s net profit includes a one-time benefit of ₹2,731 crore from sale of stake in SBI Cards & Payment Systems. Remember the much-hyped SBI cards IPO?

But you’ve got to give it to the bank. Chairman Rajnish Kumar mentioned that 98% of the branches remained open during these tough times. That’s close to 22,000 branches spread across the nation.

Why not take a salary cut to save costs? The Chairman recently joked that he would have to live on the streets if his salary was cut. Although this is all in jest, just notice the difference in compensation structure between the top public lender and the top private lender in the country:

Image source: SBI FY19 Annual Report

Image source: HDFC FY19 Annual Report

However, despite all this profit, the bank is aware that it is only going to get worse. What does a bank do when it can’t earn interest on loans due to muted demand? It cuts interest rate on deposits. That’s exactly what it did.

If you’re a SBI-account holder, you are earning a measly 2.7% on that idle money lying in your savings account. Time to shift to liquid funds?

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What’s up with RBI?

#1 RBI made an important announcement this week. It is going to create a Payments Infrastructure Development Fund (PIDF).

Corpus? ₹500 cr, half of which is going to be put up by RBI itself and the other half from banks and card networks.

Purpose? “to deploy Points of Sale (PoS) infrastructure (both physical and digital modes) in tier-3 to tier-6 centres & north eastern states.” PoS are those machines where you swipe your cards.

So why is RBI doing this? Because it is trying to push digital payments and remove the dependancy on cash. A post on LinkedIN I wrote 3 months ago should provide some context:

An Introduction to the MPC

The #2 important press release from RBI this week was the release of the minutes of the MPC (Monetary Policy Committee) meeting. Before I delve into it, let us understand why it is important and what to infer from it.

Before I answer the two questions, we need to know what it is.

The MPC is responsible for fixing the benchmark interest rate in India. The meetings are held at least 4 times a year and it publishes the transcript of the decisions after 14 days of each such meeting. The committee comprises six members - three officials of the RBI and three external members nominated by the Government. Decisions are taken by majority with the Governor having the casting vote in case of a tie. The current mandate of the committee is to maintain 4% annual inflation until 31 March 2021 with a -2/+2 tolerance

Big deal! I already know the repo rate. What will I gain by reading the report 14 days AFTER the announcement?

Well, for starters, what happens to interest rates in the country matters to you as a saver, investor, consumer and borrower. High rates can help savers earn more on debt options. Loan-takers may prefer lower rates. Reading the report (if you have time) also allows you to understand what the central bank is thinking. Are they just focusing on inflation? Or economic growth? What is their stance? What will they do next?

Let’s take an excerpt from the 15-page document to understand what I’m talking about.

Here is the list of people who voted for the rate cut in the meeting.

Everyone voted for a rate cut. All good. But you see the anomaly? Why did Dr. Chetan Ghate only vote for a .25% cut rather than following the herd?

He explains, (loose translation by me)

Despite the dire growth outcomes, why have I voted for a 25 bps cut, and not a larger amount? As I mentioned in the last review, in a demand deficient economy, a large rate cut is akin to pushing on a string. For rate cuts to work, banks have to lend. Despite the large number of steps taken to improve the liquidity and functioning of credit markets, surveys show that they are not.

The document is filled with nuggets such as these. What does our governor think about banks? Which sectors of the economy are leading/lagging? Trust me. Go through it. If there’s any particular point that’s bugging you, we can always chat in the comments.

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Give me some videsi drama

Let’s talk about Singapore this week.

The country is unique in a lot of sense when it comes to banking. For example, did you know that out of a population of 59 lacs, only 2% is unbanked?

That’s a tiny bit more than 1 lac people. Okay, I might be super happy if I have 1 lac subscribers to Bank on Basak. But if you’re an entrepreneur, would you be keen on venturing out with such a small pie?

Well, businessmen in Singapore sure are bullish. When their central bank, Monetary Authority of Singapore (MAS) announced it’s intention to issue 5 digital banking licenses last year, 21 suitors lined up!

And don’t think getting these licenses are easy. Each winner must commit $1 billion for a retail licence; $72.5 million for a wholesale one. Once formed, the digital banks will also have to achieve profitability in five years.

But there’s one key thing to note here that MAS said,

The new digital bank licenses mark the next chapter in Singapore’s banking liberalization journey. We welcome firms with innovative value propositions to apply for the digital bank licenses, even if they have not yet established a track record in banking.

I guess everyone took the last part pretty seriously, because you have companies from ride-hailing services, telecom, gaming firm, tycoons, auto listings startups and even massage chair business all lined up for the coveted license.

Does this make sense? To allow someone from a completely unrelated background to gain entry into one of the most highly regulated segments in the world? So why is MAS doing this?

For years, the nation’s large traditional banks — DBS Group Holdings, Oversea-Chinese Banking Corp. and United Overseas Bank — have dominated the market. Taking bids for digital licenses is widely considered the biggest shakeup in Singapore’s financial services market in two decades.

How long before India gets its own banking tech revolution?

We’ll just have to wait. Because as of today, the coronavirus has hit the brakes on MAS taking a decision anytime soon.

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That’s a wrap for the week. What did you think? Good, bad, yuck? Let me know in the comments.

If you want to reach out to me for a detailed feedback, want me to cover a particular news, want to get featured, write a guest post or simply say hi, reach out to me at anirudha@bankonbasak.com

In the meantime, tell your friends!

P.S. You can also connect with me on LinkedIN, Twitter (these are two places where I post whatever that interests me) or on Quora (where I try to help people with their queries related to the banking sector).

Boring, yet an important disclaimer: Views/opinions expressed in this article are solely my own and not of my employer.