Would acquiring a mid-size Indian bank help Asia’s richest banker beat economic woes?

Standing tall.
Standing tall.
Image: REUTERS/Danish Siddiqui
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Back in May, when the Indian economy was at a standstill due to coronavirus-linked lockdowns, Asia’s richest banker Uday Kotak pulled off a giant feat by raising a staggering Rs7,442 crore ($992 million) from institutional investors.

Now, flush with cash, Kotak is reportedly attempting another masterstroke that could give his Kotak Mahindra Bank a significant push at a time when India’s financial sector is going through one of its worst crises.

On Oct. 25, Bloomberg reported that Kotak Mahindra Bank, currently India’s fourth largest private sector bank in terms of advances, is in talks to takeover mid-sized IndusInd Bank in an all-stock deal.

Experts believe the deal could help Kotak Mahindra Bank achieve growth, which it has struggled for so far. “Kotak Mahindra Bank is known for the quality of its loan book but high growth has eluded it because of its conservative style. Also, in the post-Covid environment, the bank has been losing market share,” says Abhinesh Vijayaraj, equity research analyst at Chennai-based financial advisor Spark Capital.

Kotak Mahindra Bank has called the report “speculative,” but asserted that it is open to the option of making acquisitions.

But many observers are taking the speculations seriously given Kotak’s past track record.

Kotak-IndusInd merger

The possibility of a merger with IndusInd Bank brings back memories of Kotak Mahindra Bank’s takeover of ING Vysya Bank in 2014.

At the time, Kotak Mahindra Bank was struggling to clock growth in a weak economic environment, which was worrying investors. But it all changed with the acquisition of ING Vysya.

Through the merger, Kotak Mahindra Bank’s loan book expanded and it also got a foothold in the southern states of India, where it didn’t have a strong presence in. The acquisition also gave Kotak Mahindra Bank exposure to small and medium enterprises and multinational corporates.

“Uday Kotak has a history of growing inorganically,” said Abhimanyu Sofat, head of research at Mumbai-based brokerage firm IIFL Securities.

Buying IndusInd Bank can help Kotak Mahindra Bank leap forward. The merger will give it a strong presence in segments like microfinance and vehicle financing, which are a significant part of IndusInd Bank’s loan book, observed Vijayaraj of Spark Capital.

The combined entity will also help Kotak Mahindra Bank close in on peers. If the merger takes place, the total advances of the combined entity will jump to Rs4.02 lakh crore compared to the Rs2.03 lakh crore loan book of Kotak Mahindra Bank currently. The deposits will almost double up to Rs4.72 lakh crore and Kotak Mahindra Bank will command a branch network of 3,193, as compared with 1,282 now.

What makes IndusInd Bank attractive is its relatively cheaper valuation.

The bank is trading at a low valuation as it is riddled with a bunch of problems including exposure to the beleaguered telecom sector. “IndusInd Bank is at a lower valuation compared to what ING Vysya was when it was acquired in 2015. Also, IndusInd Bank is sufficiently capitalised, better than most peer banks, So it could be a lucrative bet for Kotak,” explained Vijayaraj.

The merger could also be beneficial for IndusInd Bank, which has lately been in a tight spot.

IndusInd faces a difficult choice

IndusInd Bank’s stock has been beaten down from its all-time high in 2018. The departure of its long-serving CEO Romesh Sobti in March, rising bad loans, and eroding deposits have dented the bank’s prospect.

“We are seeing a scenario where smaller ones [banks] are finding it difficult to raise money,” said Sofat. Also, the Reserve Bank of India had rejected IndusInd Bank’s promoters’ proposal to infuse more equity into the lender in June, further hurting its chances of growth.