Ko­tak, Axis Deal May Cre­ate one of Largest Pvt Banks

WIN­DOW OF OP­POR­TU­NITY Bro­ker­age house CLSA sees share swap ra­tio at 0.6:1

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Mum­bai: Amid grow­ing chat­ter of a merger be­tween Ko­tak Mahin­dra Bank and Axis Bank, global bro­ker­age CLSA said that if they do merge, the com­bined en­tity would be among the largest pri­vate sec­tor banks with $120 bil­lion in as­sets and a mar­ket cap­i­tal­i­sa­tion of $40 bil­lion.

“We see a share-swap ra­tio of 0.6:1. As Axis’ val­u­a­tion is at a 40% dis­count to Ko­tak, hence the scope to raise the com­bined ROE (re­turn on eq­uity) would be key to a re-rat­ing,” noted CLSA.

High­light­ing the ben­e­fits of the merger, CLSA said that it would help these banks build on in­di­vid­ual strength and elim­i­nate branch du­pli­ca­tion, and help re­duce Ko­tak’s pro­moter hold­ing to 19% from 34%. The Re­serve Bank of In­dia has told Ko­tak Mahin­dra Bank to bring down pro­moter hold­ing to 30% by June 2017, 20% by De­cem­ber 2018 and 15% by March 2020. Ear­lier this month, when news re­ports of a pos­si­ble merger be­tween the two sur­faced, both banks called it spec­u­la­tive. Ko­tak Mahin­dra Bank’s founder Uday Ko­tak had said that he will keep all op­tions on ta­ble while de­vis­ing plans to grow the bank’s as­set and prof­itabil­ity. The com­bined en­tity would have a 6% share of to­tal loans in the bank­ing sys­tem, com­pa­ra­ble to HDFC Bank and ICICI Bank’s loan share and much higher than other pri­vate banks, said CLSA, which has an ‘out­per­form’ rat­ing on both the lenders.

On Fri­day, shares of Ko­tak Mahin­dra Bank ended up 0.5% at .₹ 796.2 and Axis Bank ended down 0.8% at .₹ 489.

How­ever, the road ahead in case of a merger con­fir­ma­tion will not be with­out its chal­lenges.

The big­gest chal­lenge for such an en­tity would be to align as­set qual­ity, and given that Axis Bank’s stressed loans at 11% are much higher than Ko­tak Bank’s 2.5%, it could push up credit costs, the bro­ker­age said.

CLSA said en­tity may also face in­te­gra­tion chal­lenges on the hu­man re­sources front as Axis is a much big­ger bank. “A merger might stretch ROE ex­pan­sion time­line for Ko­tak, which only re­cently started re­al­is­ing syn­er­gies from ING Vysya Bank,” said CLSA. Ko­tak Bank had bought out ING Vysya Bank in Novem­ber 2014. The com­bined en­tity’s sav­ings de­posit rate strat­egy will also be a key fac­tor to watch out for as Ko­tak Mahin­dra Bank of­fers 6% and Axis of­fers 4% rate, the bro­ker­age said. Axis Bank’s part­ner­ship with Max Life may also be re­viewed as a fall­out of this merger and im­pact the on­go­ing merger be­tween HDFC Life and Max Life, it added.

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