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Richest Asian banker Kotak faces push to pick outsider as successor: Sources

India’s banking regulator is nudging Kotak Mahindra Bank to select someone outside the lender’s ranks to succeed billionaire founder Uday Kotak as the next Chief Executive Officer, according to people familiar with the matter.

The Reserve Bank of India has conveyed its view to board members of Kotak Mahindra Bank and Asia’s richest financier, they said, asking not to be named, as the communication is private. The regulator is also reviewing whether stakes the banking group holds in two wholly-owned insurance units pose any risks to the firm’s stability, the people said.
India has tightened rules limiting bank CEOs’ tenure to a maximum of 15 years and has been reviewing the stakes that banks hold in insurers in order to strengthen the nation’s financial system. RBI had said in 2021 that the outgoing head should take a three-year cooling period and shall not be “appointed or associated with the bank or its group entities in any capacity, either directly or indirectly,” to ensure there is a clean break for the outgoing head from the bank.

Kotak’s tenure as CEO of India’s fourth-largest private lender ends this year. He has received shareholder approval to subsequently remain on the board. Choosing one of his lieutenants from within the bank’s ranks, while he is on the board, will defy the spirit of the regulations, leaving Kotak in a position to potentially influence decisions, according to the people.
There has been no “communication, formal or informal, from RBI to the bank or its board members on CEO succession,” a spokesperson for Kotak Mahindra Bank said in an email after the story was published. The bank had previously declined to comment on the CEO succession.
“Current holdings of Kotak in its insurance companies are as per the extant regulatory prescriptions and processes,” according to the spokesperson. An RBI spokesperson didn’t respond to emails seeking comments.
Shares of the Mumbai-based bank fell 1.2%, while the benchmark S&P BSE Sensex Index rose 0.3% as of 12 p.m. in Mumbai trading. Year-to-date the stock has risen 1.5%, compared with a 9% jump in the 30-stock index.
An outsider coming in as CEO might be “a slight negative and adds uncertainty around management changes,” Jefferies Financial Group Inc. analysts Vinayak Agarwal and Prakhar Sharma said in a note to clients on Monday. By the end of August, “the bank is expected to suggest at least three names in the order of preference, of which the RBI will approve one for appointment,” according to the note.
The financier had engaged consulting firm Egon Zehnder to lead a global search for a CEO and its top executives Shanti Ekambaram and KVS. Manian were the internal candidates for the job, Bloomberg News reported earlier this year. The RBI has a final say on appointing heads of the nation’s lenders though the bank’s boards decide on the shortlist of candidates.
Insurance Units
Kotak Mahindra’s holdings in units — Kotak Mahindra Life Insurance Co. and Kotak Mahindra General Insurance Co. — are also under review as the central bank assesses the banks’ stakes in insurance companies, the people said. It is the only major bank in the country with fully-owned insurance subsidiaries.
While Kotak Mahindra had been working with advisers, including Morgan Stanley, to pare its stakes in the insurers for several months, no transactions have been finalized as of now, people familiar with the information said. A spokesperson for Morgan Stanley declined to comment.
In the past, Kotak had challenged the RBI in court to retain his stake in the lender at a level above the regulator’s threshold. The bank had then argued that the central bank wasn’t empowered to dictate founders’ shareholdings as RBI sought to separate management and ownership functions at lenders to improve corporate governance.
Kotak has a net worth of about $14.5 billion, most of which comes from his 26% stake in the bank, according to the Bloomberg Billionaires Index. He has led the bank since it was converted into a lender in 2003 from a non-banking finance company.

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In charts: Why Morgan Stanley is bullish on India and thinks sensex can touch 80,000 next year

NEW DELHI: Foreign brokerage firm Morgan Stanley has predicted that BSE sensex is expected to touch the 80,000-mark by December 2023 if India is included in global bond indices which can result in $20 billion of inflows over the subsequent 12 months.
Other factors which can propel sensex to 80,000 points include commodity prices like oil and fertiliser correcting sharply, and earnings growth compounding at the rate of 25 percent annually over FY2022-25.
But India might have to wait until early next year to see its bonds enter the JPMorgan emerging market global index as reports suggest the inclusion has been delayed due to prickly operational issues. According to Reuters, bond settlement rules and tax complexities need to be resolved before the inclusion takes place.
The brokerage firm also sees a 50% chance of the sensex hitting 68,500 by the end of 2023, assuming that the effects of the Russia-Ukraine war do not spill over into next year, domestic growth continues its strong path and the US does not slip into a protracted recession.

“India is likely to have better growth than most parts of (emerging markets), a sustained domestic bid, a relatively strong macro environment plus light positioning by foreign portfolio investors,” said analysts at Morgan Stanley.
Bull market intact: At the helm of India’s outperformance has been government policy, including a structural rise in the domestic equity saving pool, a boost to corporate profit share in GDP and a focus on FDI flows, which raised the share of FDI in balance of payments, allowing India to run monetary policy that is less sensitive to the US Fed, and reduced the equity market’s sensitivity to US growth conditions and oil prices, said analysts at Morgan Stanley.
The brokerage expects profit share in GDP to double from its current level of 4 percent to 8 percent over the next four years, indicating that broad market earnings could compound annually at 20-25 percent.
However, in a bear case scenario, the firm sees sensex dropping to 52,000 if commodity prices remain elevated, RBI tightens aggressively and recession in the US and Europe drag down India’s growth.
There’s a 20 percent probability of this, according to Morgan Stanley.
“An up-trending profit cycle, a likely peak in short rates and ebbing global macro risks relative to 2022 make the case for absolute upside to Indian stocks,” said the brokerage.
Here we decode the key reasons for Morgan Stanley’s bullish view on India:
1. Earnings: Morgan Stanley expects 2023 corporate earnings to be strong, with an improvement in margins led by a durable rise in capital spending and benign material prices. India appears to have multiple sources of capex, including energy transition, the Internet, climate change, production-linked incentive schemes,growing exports, depleted capital stock, infrastructure, real estate and FDI going into the next few years. Rising capex is good for corporate profit margins until the capex becomes unproductive, it said.

. Consensus estimates are likely heading higher

2. Market view on 2024 general elections: Given how central policy has been to India’s improving macro and stock market outperformance, the market view on the election outcome is likely to affect stock markets considerably in the second half of 2023.
3. Likely increase in net flow: Morgan Stanley expects a rise in equity issuances in 2023 which should smother some of the bid that is coming from domestic investors. At the same time, given how deep the selling by FPIs has been,FPI buying will return to India.

4. Short rates likely peaking: The brokerage expects the RBI to exit the current rate cycle at 6.5%, or 60 bps above its current level, premised on the fact that inflation is heading lower in 2023. This will likely improve liquidity conditions, facilitate further acceleration in credit growth,and help share prices.

5. Global growth and commodity complex: If the global economy slips into recession, it would not be good news for India, which exports about 20% of its output

That said, since India is gaining share in global exports, the slowdown in global growth is affecting it less than in the past. The commodity complex,especially oil and fertilizer, may have greater impact on India’s macro conditions, given the adverse impact on inflation and,hence, rates and growth. In our base case, global liquidity is likely improving in 2023, led by a peaking of the US dollar, though in a bear case scenario this may turn out otherwise, it noted.

Relative valuations: India’s relative valuations are just off all-time highs and appear to be an impediment to further outperformance

That said, India is likely to have better growth than most parts of emerging markets,a sustained domestic bid,a relatively strong macro environment plus light positioning by foreign portfolio investors.
“Based on our indicator, the market is pricing in much less earnings growth than it was at the start of 2022,” said Morgan Stanley.

Sentiment: The market still does not appear at extremes when measured on flows, holding periods, market breadth. “Our BSE sensex target of 68,500 implies upside potential of 10% to December 2023. This level suggests that the BSE sensex will trade at a trailing P/E multiple of 25x,ahead of the 25-year average of 20x. The premium over the historical average reflects greater confidence in the medium-term growth cycle in India,” said Ridham Desai, equity strategist at Morgan Stanley.

So what should investors bet their money on?
“The peaking of short-rate hikes will likely favor non-banking lending businesses, but a recovery in credit growth favors banks, too. Continuing strong domestic growth will ikely drive outperformance of consumer discretionary stocks. Growing evidence of capital spending would likely favor industrials,” said Desai.
What should investors avoid?
Avoid defensives and global cyclicals: A reversal in absolute index returns to the upside would likely be accompanied by underperformance of defensives – consumer staples, utilities and telecom. Slow global growth likely keeps the lid on performance of global cyclicals including energy and materials, he added.
Experts believe small-caps will likely outperform large-caps –the opposite of their call at this time last year.
The brokerage firm also continues to pursue ideas around clean energy spending, defence indigenisation, a new residential property, auto, and air travel cycle, a multiyear credit cycle for financials and life insurance, digital transformation, and market share concentration, plus horizontal growth for discretionary and staple consumption and electric vehicles as key themes for 2023.

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