Enter, A Disrupter. Watch Out HDFC, Yond Kotak Has A Lean & Hungry Look

Let me have men about me that are fat,
Sleek-headed men and such as sleep a-nights.
Yond Cassius has a lean and hungry look,
He thinks too much; such men are dangerous.

- Julius Caesar to Mark Antony in Shakespeare’s play

The above quote might well have played on the lips of Aditya Puri, CEO of HDFC Bank, or Chanda Kochhar, CEO of ICICI Bank. These two big private banks have made merry in the company of sleepy public sector banks so far. But that is about to change, as new bankers – with lean and hungry looks – are appearing on the scene. Bankers like Uday Kotak or Romesh Sobti of IndusInd Bank.

Disruption is in the air in banking – again. Most newspapers today (31 March) had a front-page ad from Kotak Mahindra Bank announcing the launch of 811 banking, which is a mobile app designed to work as a zero-balance account that needs no visit to the bank branch: it’s all done in a jiffy based on PIN-authenticated Aadhaar e-KYC, and online submissions of PAN and other user details. 811 is obviously a play on the date on which Narendra Modi demonetised high-value notes and gave digital banking the kind of push that no place in the world has ever seen.

But the Kotak e-KYC is not new in itself – the idea was put to mass use by Reliance Jio, which activated mobile services in a few minutes – but the Kotak app includes an in-built debit card, a scan-and-pay solution, and – effectively – a payments bank within the broader bank. It needs no additional capital to run this embedded payments bank, and is thus well placed for horizontal expansion in the retail customer acquisition space.

811 accounts opened through e-KYC and Aadhaar will offer a deposit limit of Rs 1 lakh (the same as payments banks), and are thus a riposte to the challenge posed by impending competition from payments banks, which could disrupt the big brick-and-mortar banks. Apart from Airtel, there is PayTM getting ready to enter the payments banking arena (with 100 million e-wallet customers whom it can target), and soon Idea Cellular, Reliance Jio and some others could also get licences. Since the Reserve Bank is trying to push more e-wallets to become formal payments banks by imposing tougher KYC norms, their entry will raise costs for traditional banks by weaning away a chunk of their cheap deposits (Airtel offers 7.25 percent), and without the high branch and ATM overheads. Payments banks are effectively virtual banks, and 811 is Kotak’s entry in the space.

Kotak has its bread buttered on both sides: it has effectively launched its own low-cost payments bank through 811, and is also partner with Airtel in the mobile company’s payments bank. One should not rule out a merger with Airtel Payments Bank at some point if it makes sense.

The disruption caused by the digital payments revolution could be huge, for suddenly the fight is not just between techno-savvy private banks and stodgy public sector banks, but also between highly regarded private banks, where HDFC Bank is currently big dad.

Technology is always a double-edged sword. While early birds get the worm, disruption is often not far away even for the disruptors, for technology tends to get obsolete pretty fast. The early adopter of technology loses out when even newer technology makes its redundant and gives the others a chance to leapfrog. This is why Kotak Mahindra, IndusInd and Yes Bank should be seen as contenders for the big league.

Consider the story of the 1990s to now. The big success stories were HDFC Bank, ICICI Bank and Axis Bank, which built banking services around fewer branches and more ATMs, cards, internet and (now) mobile. The laggards in this first dash for market leadership were not only the public sector banks, but the old private sector banks (Federal Bank, Karur Vysya Bank, Ing Vysya Bank, etc).

But in the new digital rush, even the big boys will be challenged by the likes of Kotak Mahindra, IndusInd and Yes Bank. Reason: they have kept out of risky spaces like term lending, which has affected ICICI Bank and Axis, even while growing their market valuations to levels where they now have the currency to grow through acquisitions.

Barring HDFC Bank, which is head and shoulders above the rest with a market capitalisation of Rs 3,70,400 crore (as of mid-morning on 30 March), Kotak is just a whisker behind ICICI Bank (Rs 1,59,400 crore versus ICICI Bank’s Rs 1,64,400 crore), and well ahead of Axis Bank (Rs 1,19,800 crore). IndusInd and Yes have valuations of Rs 84,700 crore and Rs 65,400 crore).

The advantage that a Kotak would have over an ICICI Bank or Axis Bank is that it is not stuck with a bad loan portfolio. Only HDFC Bank is in the same happy position, having avoided term lending like the plague.

And Kotak, after the acquisition of Ing Vysya, is now turning aggressive, both on the acquisition and technology fronts. A few weeks back, the market was abuzz with the rumour that it may make a bid for Axis Bank, in case the government decided to offload its 11.5 percent stake in it held through the Specified Undertaking of the Unit Trust of India (SUUTI). The buzz led to a feeding frenzy, as rivals HDFC Bank and others realised that they should not be blindsided by Kotak’s quiet approach.

Kotak is already trying to bulk up on cash, and there is talk that it is looking to raise Rs 12,000 crore through a qualified institutional placement of shares. And Uday Kotak, Managing Director of Kotak Mahindra Bank, has talked of the need for hostile takeovers recently.

The new aggression is likely to bring out HDFC Bank’s own aggression in the banking sector, and one should see smaller private banks as cannon fodder for acquisitions. Few old private banks have the wherewithal to remain in the fight for long, and even ICICI Bank and Axis should be seen as either vulnerable to takeover or open to mergers.

The battle for supremacy will probably be fought by HDFC Bank, Kotak Bank and ICICI Bank, while the other three big private banks – Axis, IndusInd and Yes – could be either candidates for takeover or friendly mergers. Of course, the last three could also try and take over some of the smaller private banks.

But the name of the game is disruption, and banks with high branch overheads and employee strengths will be the ugly ducklings of the pack.

My bet is on a HDFC Bank versus Kotak Mahindra final in the private banking space.

For the first time ever, HDFC Bank’s CEO Aditya Puri may be faced with a worthy competitor. Having seen the payments space being over-run by e-wallets like PayTM, Puri cannot afford to allow another banker to make a grab for the same space.