Merger with ING Vysya a happy marriage for Kotak Mahindra Bank?

NEW DELHI: Analysts at top brokerage firms are of the view that the merger between Kotak Mahindra Bank and ING Vysya Bank will be a happy marriage and strategically fill many gaps for Kotak Mahindra Bank.

Ahead of Kotak Mahindra Bank announcing the deal, shares of Kotak Mahindra Bank and ING Vysya rose to all-time highs.

Kotak Mahindra Bank late on Thursday announced that it will acquire ING Vysya Bank in an all-stock deal. Kotak Mahindra Bank will give 725 shares for every 1,000 shares of ING Vysya.

According to Kotak Mahindra Bank, "ING Vysya merger will leverage synergy in branches, products." "The deal leverages significant complementarities."

Commenting on the merger, Uday Kotak tweeted, "I am excited to announce the merger of Kotak Mahindra Bank & ING Vysya Bank, subject to approvals. We will work to create stakeholder value."
According to experts, the deal would be value-accretive for Kotak Mahindra Bank and help in expanding its branch network.

“The merger between Kotak Mahindra Bank and ING Vysya, if it happens, will be a happy marriage and strategically fill many gaps for Kotak,” brokerage firm Nomura said ahead of the announcement.

The deal will also give Kotak Bank access to ING's SME platform. ING Vysya’s key strength is in SME - approximately 38 per cent of loans.

How will Kotak Mahindra Bank benefit from the deal?

1) “The amalgamation would give Kotak access to ING Vysya’s 573 branches (90% of Kotak’s current branch network). An important point to note is that Kotak doesn’t have branch presence in 65 per cent of ING Vysya’s current branch locations.

2) “The deal, if concluded as a full share swap deal, will help reduce the promoter stake at Kotak Bank from 40.07 per cent to 33 per cent. Note, the RBI has mandated that Kotak Bank reduce its promoter holding to 30% by December 2016 and 20% by March 2018,” Morgan Stanley said in a report.

3) “The acquisition will increase Kotak’s number of branches from 600 in FY14 to 1,200 branches and give access to ING’s SME platform. ING Vysya’s key strength is in SME,” Nomura said in a report.

4) “With Kotak trading at 4x FY15F book, ING Vysya’s acquisition at 2.2x will be highly EPS and book-accretive - at these valuations, the deal will be 7-8 per cent EPS-accretive and over 10 per cent book-accretive.

5) “CASA ratios for Kotak and ING Vysya at 32-33% are very similar, but since SME banking is CASA-heavy, liability franchise in the long run would benefit,” it said.



Valuations:

Nomura has a ‘neutral’ rating on Kotak, which is more valuation-driven (currently 3.25x Sept-16 book). An acquisition of ING Vysya strategically would make sense, and if it happens at valuations which are 10 per cent EPS/book accretive, then we would be incrementally positive on Kotak Bank, added the report.

Morgan Stanley has ‘overweight’ rating on Kotak Mahindra Bank and ‘equalweight’ rating on ING Vysya Bank.

Kotak Bank has the highest leverage to an improving macro environment which is driven by a) its strong balance sheet - Tier 1 at 16.6% and negligible asset quality issues; b) cyclical uplift to capital market revenues and high potential for recoveries from investments in stressed assets, which could help to more than double earnings in the next three years, said the Morgan Stanley report. Valuations are not cheap at 18.8x F16e P/E, but sustained earnings compounding is likely to keep the multiples intact.

On ING Vysya Bank, Morgan Stanley expects asset quality pain to decrease and revenue growth to improve in line with the recovering macro climate.