Is A Kotak-Federal Bank Merger Even Feasible?
Does a merger between Kotak Mahindra Bank and Federal Bank make sense?
Federal Bank Ltd. has been in focus amid media reports that Kotak Mahindra Bank Ltd. is in preliminary discussions for a potential acquisition of the Ernakulam-headquartered lender.
The top managements of both the lenders had met for a potential deal, CNBC-Awaaz had reported. That drove Federal Bank's stock 3.18% higher on Monday compared with a 1.13% rise in the Nifty Bank Index. The shares, however, fell on Tuesday.
Federal Bank, in a clarification to exchanges, on Monday called the news report "speculative".
"In this regard, we would like to state that there is no information available with the Company (Federal Bank) as of today, which is required to be reported under extant SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, and which may have a bearing on the stock price of the Company," the lender said in its denial.
Federal Bank has not initiated any conversations with any lender regarding a potential deal, a person with direct knowledge of the matter told BQ Prime on the condition of anonymity.
While the transaction continues to be in the realm of speculation, BQ Prime looks at what such a deal could mean for both the lenders.
Business Profiles
Federal Bank's total advances as of June 30 stood at Rs 1.51 lakh crore, while total deposits stood at Rs 1.83 lakh crore. In comparison, Kotak Mahindra Bank's advances stood at Rs 2.8 lakh crore and liabilities were at Rs 3.16 lakh crore.
The loan book is split between 54% retail loans and 46% in wholesale lending for Federal Bank. In case of Kotak Mahindra Bank, the retail book constitutes a higher 67%, while corporate and small and medium enterprises account for the rest.
In terms of asset quality, both lenders have stable portfolios, with Federal Bank's net non-performing asset ratio at 0.94%, compared with Kotak Mahindra Bank's 1.5% as of June.
Analysts at Emkay Global said that Federal Bank could be an attractive buy for Kotak Mahindra Bank due to its:
Large asset book, along with its retail-cum-SME portfolio
Reasonable asset quality
Fair branch-network size
Healthy liability profile with room for improvement
Strong digital capabilities being available at attractive valuations
"For Federal, the merger could offer access to a larger banking/product platform, capital and productivity gains. That said, Federal’s management claims that the bank is in fact looking for an acquisition in the MFI space instead of being acquired," Emkay Global analysts said in their report on Tuesday.
CLSA analysts, in a report, said that Federal Bank's net worth-to-net profit for FY23 and FY24 is likely to be around 24-25% of that of Kotak Mahindra Bank.
"Dilution for Kotak (Mahindra Bank) at the current price would be 7% and even assuming a 20-40% premium, dilution for Kotak (Mahindra Bank) would be <10%. We estimate the deal to be 13-16% earnings/book accretive for Kotak even after factoring-in some material premium," CLSA said.
Material Challenges
One of the biggest challenges to such a transaction would be Federal Bank's diversified ownership structures.
Currently, the bank does not have a single promoter. Only ICICI Prudential Mutual Fund (5.76%), HDFC Mutual Fund (4.55%), Reliance Capital Trustee Co Ltd (3.84%), the Rakesh Jhunjhunwala family (3.64%) and M A Yusuff Ali of Lulu Group (3.62%) own material stakes in the bank. Analysts said this diversity among owners could be a challenge for Kotak Mahindra Bank.
That said, the prospects of better future returns under Kotak Mahindra Bank, due to unwinding of Federal Bank’s under-penetrated customer franchisee and growth acceleration, could possibly allure shareholders to support the deal, certainly for premium valuations, the Emkay Global analysts said.
Another major challenge is the 12,900-employee base at Federal Bank which is unionised. The labour unions had proven to be a difficult challenge for Kotak Mahindra Bank to counter during its acquisition of ING Vysya in 2015.
At Federal Bank, about 80% of the workforce is part of unions, compared with 35% at the erstwhile ING Vysya. Moreover, cultural integration is going to be a difficult challenge too.
A large part of Federal Bank's employee force is based in Kerala and comes at a higher cost. According to estimates by Emkay Global, the cost per employee for Federal Bank is higher at Rs 14 lakh, compared with Rs 8 lakh for Kotak Mahindra Bank.
"Past experience from the ING Vysya acquisition suggests that the integration could be a lengthy process and, so, KMB’s promoter cum MD & CEO (Uday Kotak)’s short tenure till Jan-24 could be another dampener," the Emkay analysts said.