What A Possible Kotak-IndusInd Combine Will Look Like

A possible Kotak Mahindra Bank-IndusInd Bank combine will make it a closer fourth in terms of private sector bank rankings.
A motorcyclist wearing a protective mask rides past a Kotak Mahindra Bank Ltd. branch on a near-empty street in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)
A motorcyclist wearing a protective mask rides past a Kotak Mahindra Bank Ltd. branch on a near-empty street in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

Kotak Mahindra Bank is exploring an all-stock takeover of IndusInd Bank Ltd., Bloomberg reported on Sunday. The deal, if fructified, will create a stronger number 4 among India’s private banks.

“We have no comment to offer,” said Rohit Rao, chief communication officer at Kotak Mahindra Bank Ltd. IndusInd International Holdings, the promoter of IndusInd Bank said they completely deny the said rumor and considers it “malicious, untrue and baseless.” “IIHL is promoted by the Hindujas and broad base of other successful NRIs from the overseas Indian diaspora. They reiterate their full support to the IndusInd Bank, now and always,” the statement from IndusInd International Holdings said.

A Closer Fourth

Kotak Mahindra Bank currently ranks as the fourth-largest private sector bank in terms of assets. The acquisition, if it happens, will still leave the combined entity at number four, behind HDFC Bank Ltd., ICICI Bank Ltd. and Axis Bank Ltd. But it will narrow the gap between the top three lenders and the Kotak-IndusInd combine.

As of June 30, 2020, Kotak Mahindra Bank had total assets of Rs 3.78 lakh crore with advances of Rs 2.04 lakh crore. The lender had deposits worth Rs 2.61 lakh crore.

IndusInd Bank had assets of Rs 3.18 lakh crore and advances of Rs 1.98 lakh crore. Deposits stood at Rs 2.12 lakh crore.

As such a combined entity would have assets of Rs 6.96 lakh crore and still be the fourth largest private lender. It will narrow the gap with Axis Bank, which has total assets of Rs 8.97 lakh crore. HDFC Bank and ICICI Bank are the top two private lenders in the country.

A combined entity will have a pan-India presence with 3,511 branches and 5,237 ATMs.

Acquiring IndusInd Bank would result in Kotak’s asset book, loan book and branch network increasing by 85%, 94% and 100%+thereby giving it tremendous scale/size benefits. Moreover, IndusInd Bank is now trading at closer to book value on a forward basis and hence the acquisition could come at an attractive price. Kotak paid closer to 2.0x price/ book value for ING Vysya Bank.  
Suresh Ganapathy, Analyst, Macquarie Research
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What Could Be Driving The Merger?

Should the acquisition fructify, it won’t be the first time that Uday Kotak has chosen to grow his eponymous lender via acquisitions.

In November 2014, Kotak Mahindra Bank acquired ING Vysya Bank in an all-stock deal. At the time, the deal helped Kotak expand its presence in the southern states and also allowed the promoter group to reduce its shareholding to 34%.

Since then, Uday Kotak has seen a stand-off with the Reserve Bank of India over his stake in the lender, which remains above the generally permitted shareholding. While a legal battle was initiated by Kotak, eventually the two sides reached an agreement.

As per the agreement arrived at in January 2020, the promoters of Kotak Mahindra Bank were to reduce their shareholding to 26% within six months, which they achieved. Thereafter, the promoters cannot purchase any further paid up voting equity shares’ of the Bank till their shareholding reaches 15%, the agreement mandates. The promoters’ voting rights in the bank are capped at 15% of paid-up voting equity share capital starting April 1, 2020.

An all-stock deal with IndusInd Bank will help Uday Kotak bring his stake down closer to the RBI mandated threshold of 15%, although the extent of dilution can only be judged after share-swap ratios are decided.

Meanwhile, IndusInd Bank’s promoters saw their request to increase stake in IndusInd Bank to 26% denied by the RBI earlier this year. Thereafter, the lender raised capital from a clutch of investors, including hedge fund Route One, which increased its shareholding in the Hinduja Group - owned bank to 10%.

“There have been concerns both on the assets as well as liabilities side for IndusInd Bank, though at the margin, we believe, some of those concerns are getting adequately addressed by the new CEO Sumant Kathpalia,” Ganapathy said.

If it were to happen, a combination between IndusInd Bank and Kotak Mahindra Bank would leave the combined lender with adequate capital and an extensive network to grow when economic conditions improve.

Kotak Mahindra Bank, which is due to report quarterly earnings on Monday, had a capital adequacy ratio of 21.7% as of June 2020. IndusInd Bank had a capital adequacy ratio of 15.16%.

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