Dalal Street Investments

Why ING Vysya Natural Fit for Kotak Bank to Takeover ?

November 20, 2014

Kotak Bank is in talks with ING Vysya Bank for an acquisition. ING has been selling assets across the Asian region in its effort to shore up its capital base to meet Basel-III norms.

Kotak has been a very conservative banker and has used capital very prudently, in our view. ING would be an ideal target for it, in our view, as there are less culture issues compared to other old private sector banks that have old workforces and considerable productivity and trade union issues. Secondly, Kotak hardly has a presence in the South, unlike ING – which therefore offers a complementary fit.

Uday Kotak, the bank’s promoter, needs to reduce his stake from the current 40% to 20% over the next four years – and this is not easy for a bank that has Tier-1 capital of above 15% as a large capital raising is unlikely. Hence, if Mr Kotak decides to acquire ING via a share-swap deal, his effective stake would reduce. Mr Kotak has always been of the view that he will sell his holding only if there is no other option left to reduce his percentage holding. He did very recently for the first time sell some shares to bring down his stake from 43% to 40%.

Implications of the Deal
Such a deal would more than double Kotak Mahindra Bank’s branch network. A 17% equity dilution for a 90% increase in branch network is not bad economics, in our view. Deal is ROE dilutive as Kotak is acquiring a bank which has a ROE of just 10%. Kotak’s value per branch and profits per branch are currently 5x and 2x those of ING Vysya Bank respectively.


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