Kotak, Axis Deal May Create one of Largest Pvt Banks
WINDOW OF OPPORTUNITY Brokerage house CLSA sees share swap ratio at 0.6:1
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.