Asia’s richest banker Uday Kotak led Kotak Mahindra Bank’s potential takeover of its smaller rival IndusInd Bank Ltd would create India’s eighth-largest lender in terms of assets. As per a Bloomberg report, the collaboration would boost the Kotak Mahindra Bank’s assets to Rs 7 trillion ($950 billion).
This is going to be India’s biggest-ever banking deal at a time when the country is battling one of the worst bad debt problems in the world. Also, this deal would cement Kotak Mahindra Bank’s position as India’s fourth-largest private bank, narrowing the gap with Axis Bank Ltd.
As per a report by Macquarie Capital Securities analysts, Kotak Mahindra Bank has always found it difficult to build scale organically. Acquisition of IndusInd Bank would result in Kotak’s asset book, loan book and branch network growing by 85%, 94% and more than 100% respectively. Therefore, this deal would give Kotak Mahindra Bank a tremendous scale benefits.
The Kotak Mahindra Bank is already seeing market value hike in the stock market with the talk of the merger and the bank’s unexpected profit surge. With this, Kotak Mahindra Bank has pushed back its rival ICICI Bank Ltd to become India’s second-largest bank in terms of market value.
Kotak Mahindra Bank’s shares have surged 15% this week, leading to a market capitalization to around 3.1 trillion rupees. Analysts believe, if the deal moves ahead through a share swap at IndusInd’s current stock price, Kotak Mahindra Bank’s market value would increase by around Rs 464.5 billion. This would place the bank well ahead of its closest rival ICICI Bank.
This potential merger would boost Kotak Mahindra Bank’s deposits by 81% to Rs 4.7 trillion, way behind HDFC Bank Ltd.
According to Bloomberg Intelligence’s analysis, in case the Kotak-IndusInd deal goes ahead, Kotak Mahindra Bank’s excess capital, healthy balance sheet and conservative management could allow it to benefit from IndusInd’s well-diversified loan book and low valuation of 1.1x forward price to book.
Indian financial sector that worth almost $2 trillion, houses 20 private sector banks and 13 state-run banks. The sector has been struggling due to two-year long economic crisis and lately the Coronavirus pandemic, which is likely to shrink the Indian economy to the most in 40 years.
Public sector banks in India (Government shareholding %, as of 30th June, 2020)
|State Bank of India||57.64%|
|Punjab National Bank||85.59%|
|Bank of Baroda||71.60%|
|Union Bank of India||89.07%|
|Punjab & Sind Bank||83.06%|
|Bank of Maharashtra||92.49%|
|Bank of India||89.10%|
|Central Bank of India||78.55%|
|Indian Overseas Bank||95.84%|
|India Post Payments Bank (IPPB)||100%|
Indian banking sector’s bad loan ratio is already worst among the major countries. It is a stiff competitive segment with more than 30 lenders catering around 574 million Indians who have basic savings accounts.
The bad loan ratio in India is likely to grow to 12.5% by March hitting the early recovery hopes hard. The Kotak Mahindra Bank and IndusInd Bank deal is unlikely to impact their bad debt significantly.