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Banking Central | Does a Kotak-IndusInd marriage make sense?

Kotak Mahindra Bank may benefit in the long term by acquiring IndusInd but any bank merger comes with prolonged integration issues. Is this the right time?

October 26, 2020 / 06:56 PM IST

Late on October 25, news agency Bloomberg reported that Kotak Mahindra Bank is exploring an all-stock deal to take over its smaller rival, IndusInd Bank. The "deliberations" were at an early stage and talks could fall through, the report said.

The news (or rumours as IndusInd would call it) triggered immediate reactions from both the lenders and the promoters of IndusInd Bank, IndusInd International Holding Ltd. 

While Kotak said it won’t comment on the report, IndusInd promoters issued a strongly worded denial that essentially said the “rumour” was “malicious, untrue and baseless”. The bank separately issued a statement to stock exchanges repeating the same.

An official of Kotak Mahindra Bank who spoke on condition of anonymity told this writer that there was no basis for the merger report.


Does the merger make sense for Kotak?


Every entity wants to grow big. Kotak Mahindra Bank, in the past, has hinted at its ambition to grow big. Founder and CEO Uday Kotak even thinks this is the best time to invest. Of course, IndusInd will be a valuable addition to Kotak in the long term, offering a bigger branch presence and a heavier loan book.

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According to a Macquarie note, a takeover of IndusInd “would result in Kotak’s asset book, loan book and branch network increasing by 85per cent, 94 percent and 100 percent respectively, thereby giving it tremendous scale/size benefits”.  

Macquarie analysts also say the acquisition will come at an attractive price for Kotak since IndusInd is now trading close to its book value on a forward basis.

However, IndusInd Bank’s shareholders seem to be enthused with the merger rumour. On October 26 morning, IndusInd Bank shares were trading 3.34 percent up from their previous close while Kotak was trading 2.6 percent down.

IndusInd has gone through a rough patch, with aggressive growth vulnerability on the microlending book.

Macquarie says there have been concerns, both on the assets and liabilities side, for IndusInd Bank. After acquiring Bharat Financial, formerly SKS Microfinance, IndusInd has grown its microlending book to over Rs 23, 000 crore. The bank has maintained that there are no major concerns on this portfolio but analysts have sounded caution. 

Kotak has been a very conservative and cautious lender when it comes to the loan book. Should the bank venture into another merger and be willing to begin the process all over again?

There is a section of analysts who believe that a merger with IndusInd doesn’t make sense for Kotak at this point. “All of this looks like a speculation to me,” said Siddharth Purohit of SMC Global Securities.

“Except that the Kotak promoter can reduce stake through this deal, there is no real benefit for Kotak from this merger. It took almost three years for Kotak to streamline the ING Vysya merger and get some benefit out of it,” said Purohit. 

Kotak bought ING Vysya in an all-stock deal in 2014. As Purohit said, it took a long period for the private lender to streamline human resource (HR) integration issues and complete the process.

A bank merger comes with three sets of problems—mainly synergy of working and operational culture, HR and technology integration. “It will be a long, tiring process for Kotak if at all they do this,” Purohit said.


What will a combined entity look like?

A merged entity will have size adequate to lift Kotak closer to the big three among private banks—ICICI Bank, Axis Bank and HDFC Bank. A combined entity will have 3,511 branches, about Rs 6.6 lakh crore of total assets and a network of 5,237 ATMs.

If Kotak’s ambition is to grow size and scale and compete with the big three, ignoring near-term concerns, then the IndusInd deal makes sense. But at a time when the industry is in a crisis brought about by a deadly pandemic, is facing uncertainty over asset quality and there is a steep contraction in the economy, should Kotak go ahead with a merger only because it is cheaper? Over to Mr Kotak.


(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)

Dinesh Unnikrishnan
first published: Oct 26, 2020 11:48 am
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