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Friday, November 21, 2014

Kotak-ING Vysya merger: good fit, good deal

ING Vysya Bank makes a good fit for Kotak Mahindra Bank in many ways. The merger will help Kotak Bank expand its reach at a time when competition in the sectoris set to grow.

Kotak’s network of 641 branches will nearly double with the addition of 573 branches of ING Vysya Bank. Kotak Bank, currently present in metros, will benefit from ING Vysya’s better mix of rural and urban branches along with its strong presence in South India. The chunk of Kotak’s branches are in West and North India.

Next, ING Vysya has been building its high-yielding SME loan portfolio, which has been its core strength. The bank’s SME loan portfolio constitutes 35 per cent of its total loans. For Kotak Bank, this segment is less than 10 per cent of its portfolio. In the past couple of quarters, Kotak Bank’s loan growth has been led by the corporate, small businesses, personal loans and agriculture segments. Within the corporate segment, the bank has been increasing its focus on the mid-market space (Rs5-25 crore); and the merger will hence help the bank build its presence within this space.

ING Vysya also has a strong funding base. The current account, savings account (CASA) ratio is now 33 per cent, up from 27 per cent five years ago. More than half of this has been from current account deposits, which carries zero interest. For Kotak Bank, the differentiated rates on savings deposits has helped it build a strong deposit base. The merger of the two banks will enhance the CASA profile.

 Kotak Bank has also been sitting on excess capital (capital adequacy of 17.6 per cent) and has to cut down its promoter’s stake in the bank from the current levels of about 40 per cent to 20 per cent by March 2018 according to the RBI’s directive. Post-merger, the promoter’s stake in the combined entity will be 34 per cent. The capital adequacy of the combined entity will be about 16.5 per cent, which will continue to provide adequate headroom for growth.In terms of valuations, the deal is a good one. At about two times ING Vysya’s book value, the deal is reasonable in the context of past mergers within the banking space.

Source : Thehindubusinessline


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