Federal Bank deal may drive Kotak Bank EPS up 12%, estimates CLSA

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26 Aug, 2025 12:21

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A potential merger of Kerala-based Federal Bank with Kotak Mahindra Bank could boost the Mumbai-headquartered lender's earnings per share (EPS) by as much as 12 percent, brokerage firm CLSA India has said.

On September 5, CNBC Awaaz reported that both private lenders were in initial discussions for a merger, however, the report was termed as “speculative” by the Federal Bank, which CLSA said neither confirms nor denies the report.

“Fundamentally, regional banks are a strong liability franchise in their micro markets, and in Kotak Bank’s case we have highlighted it would need to increase liability mobilization with its strong growth ambitions, and hence a merger would be positive,” CLSA India said in a note.

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The brokerage firm said the dilution in Kotak Bank’s stock price if the merger were to go through at the current prices would 7 percent and even if Kotak Bank were to pay a premium of 20-40 percent for Federal Bank, the dilution would still be less than 10 percent.

CLSA said that Kotak Mahindra Bank’s loan growth prospects remained strong at more than 20 percent annually over the next three years but India's third largest private sector lender faced challenges in mobilising deposits.

In the quarter ended June, Kotak Bank reported a 10.2 percent year-on-year growth in deposits at Rs 3.16 lakh crore. In the same period, Federal Bank reported an 8.2 percent on-year growth to Rs 1.8 lakh crore, of which 94 percent was retail deposits.

Federal Bank operates 1,300 branches with low overlaps with those of Kotak Bank and its current deposit base would materially boost Kotak Bank’s overall deposit base.

The highly unionised labour force of Federal Bank, however, could pose challenges in terms of integration and improving efficiency levels, CLSA said.

“Also, unlike ING Vysya, share ownership of Federal Bank is dispersed but investors should be fine with owning Kotak Bank’s shares assuming they receive a premium in a merger,” the brokerage firm said.

At 10.21 am, Kotak Bank shares were down 1 percent at Rs 1,918.50 on the National Stock Exchange, while those of Federal Bank were also trading 1.1 percent lower at Rs 122.20.

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