Kotak Mahindra Bank – Low Cost Liability Banking Franchise

Think of it a little differently.

Compare ROA and ROE. Roughly ROE/ROA = Leverage.

I have annualised latest Q profits and denominators are 31 Dec 2022 numbers. Numbers are standalone to remove impact of non bank subsidiaries and have a LFL comparison.

Kotak Mahindra Bank

ROA = 2.4%
ROE = 14%

Leverage = 5.8x

HDFC Bank

ROA = 2.1%
ROE = 18.3%

Leverage= 8.7x

Effectively HDFC Bank is sweating it’s equity capital more than Kotak and running an efficient capital structure. Both have high quality liability as well as asset franchises.

Kotak runs a fairly conservative liability side (high CASA and higher capital) and a conservative asset side as well (they reduce growth when they feel uncomfortable whereas HDFC actively finds best risk reward across segments to gun out that consistent growth)

Excess capital allows Kotak to make acquisitions, although small ones won’t make a dent. And also capitalise the other subsidiaries – although not sure how much of that has been happening.

For what is worth – SBI leverage is in the high teens given ROE is closer to HDFC Bank whereas ROA is around the 1% mark.

I don’t think Kotak (in the short – medium term) gets to HDFC Bank or ICICI or Axis levels of leverage given management philosophy is different and you’ve got a controlling promoter who’s fairly conservative.

But never say never. Maybe they make a big acquisition and start to run the business at 7-8x.
There’s routinely news about them acquiring Federal, Yes, IndusInd etc. Not sure if any of them would meet their asset quality criteria without being heavily restructured.

To conclude.

I would imagine that a ROA to P/B relationship is much stronger than a ROE to P/B one.