Why Uday Kotak May Stay Away From Axis Bank

A merger between Kotak Mahindra Bank and Axis Bank may not be a natural fit

People walk past a branch of Axis Bank Ltd. (Photographer: Prashanth Vishwanathan/Bloomberg)  
People walk past a branch of Axis Bank Ltd. (Photographer: Prashanth Vishwanathan/Bloomberg)  

This week has been littered with rumors about a possible merger between Axis Bank and Kotak Mahindra Bank, even though both banks have denied such talk. The news report first surfaced in the Times of India on February 9 and cited unnamed fund managers who thought the combination was a good idea. They cited the need for the promoters of Kotak Mahindra Bank to reduce their stake in the bank as one reason why such a merger made sense. The other reason cited was the government’s divestment target as part of which SUUTI may want to sell its stake in Axis Bank.

Promoter Stake In Kotak Mahindra Bank

One factor fueling these rumors is the long-delayed requirement for the promoters of Kotak Mahindra Bank to bring down their stake in order to meet regulatory requirements. On February 1, the bank disclosed to stock exchanges that it had received another communication from the Reserve Bank of India.

The bank has received communication from the Reserve Bank of India to bring down its promoter shareholding to 30 percent by June 2017, 20 percent by December 2018 and 15 percent by March 2020.
Kotak Mahindra Bank Disclosure To Stock Exchanges

The shareholding pattern disclosed to exchanges shows that promoters currently hold 33.61 percent in the bank. While meeting the 30 percent target by June 2017 could be achieved through a sale of shares to institutional investors, meeting the 20 percent target by end of next year will be a challenge.

Kotak has dragged this issue on for some time now and has received numerous extensions from the banking regulator already.

In June 2012, the RBI had asked the Kotak promoter group to bring down their stake to 20 percent by March 2018. At the time, the promoters held 45 percent in the bank. Between 2012 and 2014, they reduced their stake through small sales to instutional investors.

The big reduction in promoters’ stake came at the time of the merger with ING Vysya Bank in 2014, when it fell from 40 percent to 34 percent. It has remained at about those levels since then.

Why Uday Kotak May Stay Away From Axis Bank

The Axis Bank Side Of The Story

On the side of Axis Bank, the promoter shareholding is at 30 percent but this is largely held by government institutions. The government-owned SUUTI (Specified Undertaking of the Unit Trust of India) now holds 12 percent after having reduced stake once in 2016. Life Insurance Corporation of India (LIC) holds about 14.5 percent.

The government’s decision to set itself a lofty disinvestment target of Rs 72,500 for FY18 is leading analysts to believe that a bulk sale of SUUTI holdings, including in Axis Bank, may be on the cards.

The speculation also comes at a time when Axis Bank is going through a rough patch.

For the December ended quarter, the country’s third largest private lender reported a meager profit of Rs 579.57 crore, a 73 percent drop compared to the previous year. Between the quarter ended September 2015 and the quarter ended December 2016, gross non performing assets (NPAs) at the bank have jumped five times from Rs 4,451 crore to Rs 20,467 crore. Though Axis Bank’s gross NPA ratio at 5.2 percent is lower than that of ICICI Bank which has gross bad loans at 7.9 percent of the total book.

Axis Bank also found itself in the headlines for all the wrong reasons during the implementation of the government’s demonetisation decision with some officials being suspected of wrong-doing in the exchange of old currency notes.

Axis Bank-Kotak Mahindra Bank: Do They Fit?

No matter what the impetus, Uday Kotak, is too canny an entrepreneur to be convinced of a merger unless hard numbers back a synergy.

At the end of the December quarter, Axis Bank has a loan book of Rs 3.47 lakh crore while Kotak Mahindra Bank had a book of Rs 1.29 lakh crore. Axis Bank’s book is evenly divided between corporate and retail with the former accounting for 45 percent and the latter accounting for 43 percent of the loan book. In the case of Kotak, about 60 percent of the book falls in the corporate category. A combined book will be more evenly divided.

On the liabilities side, however, there is not much to gain. Kotak Mahindra Bank has a CASA (low cost deposits) ratio of 42 percent with Axis Bank at a not-much-higher 48 percent.

Branch network is also no longer enough reason for a merger. If anything, it may be a disincentive. Axis Bank has 3211 branches while Kotak Mahindra Bank has 1348 branches. A potentially combined entity would be over-branched and may need to undertake considerable consolidation.

The bigger disincentive will be the quality of Axis Bank’s loan book. The Rs 20,467 crore in bad loans come from accounts which are likely to be tough to resolve. It has another Rs 11,000 crore in assets under a ‘watch list’ for potential stress. Power, iron and steel, infrastructure are areas where these bad assets are concentrated.

Kotak in contrast has kept a strict watch on asset quality. It’s gross NPAs are at a comfortable 2.4 percent and showed no significant spike following the RBI’s asset quality review. Kotak, which finished the process of integrating ING Vysya with itself only in September 2016, may not want to jump into an even tougher merger so soon after.

Why Uday Kotak May Stay Away From Axis Bank

To be sure, both banks have denied the rumors. Kotak Mahindra Bank said it does not comment on speculation, while Axis Bank issued a stronger statement to the stock exchanges.

“Axis is one of the strongest institution in the country with a large customer franchise and we urge media to exercise extreme caution in dealing with such misinformation."