Dalal Street Investments

Kotak Bank to be 4th Largest Private Bank after ING Vysya Merger

November 21, 2014

Kotak 4th Largest Private BankKotak Bank will offer 725 shares for every 1000 shares held in ING Vysya Bank. The swap ratio at current prices implies a valuation of Rs159 bn for ING Vysya Bank (2.1x Sept- 14 BV) and is 2.6% higher than its last closing price. The good part is that Kotak is using its expensive stock currency (4.3x trailing book) to buy an asset at 2xBV. However, lower RoE for ING Vysyawill deplete the RoE for the combined entity and Kotak will have to grow fast to improve RoE over time. The deal will result in 18% dilution for Kotak Bank at current prices.

Kotak Bank will induct one member from ING Vysya Bank on the board of the merged entity. Kotak Bank intends to keep one savings account interest rate after the merger. On our computations, if Kotak Bank maintains its SA interest rates, the impact on F15e pro forma merged EPS will be ~2.1%.

More importantly, the branch network at the merged level will complement well – 80% of Kotak’s branches are in West and North India, but ING Vysya has 64% of its branch presence in South India. By our computations, Kotak does not have branch presence in ~65% of ING Vysya’s current branch locations. The merger will help Kotak enhance its product profile in key segments like FX and SME clients, where ING Vysya has a strong foothold. In addition, the merger will help reduce Kotak Bank’s need for aggressive organic branch expansion, and it will lower costs.

The promoter stake in Kotak will fall to 34%, a reasonable relief. Post merger, the foreign holding will be 47%, ING will own 6%. The merged entity is likely to report an EPS of Rs 48 and Rs 60 for FY15 and FY16. At the CMP of Rs 1,200, we feel Kotak Bank is Fully Priced and existing Investors who have bought on our recommendation here may continue to hold.

Fresh Exposure to Kotak Bank can be made on Correction.


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