Kotak-ING Vysya Merger Set To Create Fourth Largest Private Bank in India

Kotak-ING Vysya Merger Set To Create Fourth Largest Private Bank in India

In a joint statement issued by Kotak Mahindra Bank and ING Vysya Bank on 20th of November, 2014, the amalgamation of these two private banks was announced in what is already being touted as one of the largest banking mergers and acquisitions in recent times. As a part of this mega merger worth $2.4 billion, Kotak Mahindra Bank is all set to acquire ING Vysya Bank in an all-stock deal which would arguably create the fourth largest private banking corporation in India.

The shareholders would receive 725 shares of Kotak Mahindra Bank against 1000 shares of ING Vysya Bank according to the share-swap ratio and expert valuations made by the concerned parties. This would lead to 15 percent dilution for Kotak Mahindra Bank, belying market expectations of nearly 20 percent dilution. It should be noted that ING Vysya shares are valued at Rs 790 per share which is nearly twice its estimated book value for FY15 which is considered fair valuation by experts.

In anticipation of the deal, shares of both the private banks surged on the day of merger’s announcement by nearly 7 percent each, although, interestingly, the official announcement of the merger came after the market hours. The next day also, banking stocks in general and stocks of these two banks in particular touched record highs for the second successive day. Considering the fact that this happens to be the largest banking merger and acquisition in India after the 2008 global meltdown, the positive vibe in the stock market can be well understood.

Here are some of the salient points concerning this all-important deal which is set to drive banking stocks higher at least for a while:

  1. The combined banking entity is set to have 1,214 branches spread across the India, which would offer Kotak with strategic advantage considering the fact that most of its branches are concentrated in the North and West India whereas ING Vysya encompasses much of South India. Additionally, Kotak can think of leveraging the global outreach of ING Vysya to its greater advantage in the post-merger scenario.
  2. On the other hand, the stake of Kotak in the merged entity will come down from current 40 percent to 34 percent with ING Vysya as the second-largest shareholder with a stake of 6.5 percent. It is notable that currently ING Vysya holds a stake of 43 percent as a separate entity.
  3. As per experts, the latest banking acquisition has been finalized at a price/book value ratio of 2:1 which is quite a bargain. This is in stark contrast to the 2010 acquisition of Bank of Rajasthan by ICICI Bank in 2010 at nearly 5 times the price/book value ratio and HDFC Bank and Centurion Bank of Punjab merger at about 6.8 times the price/book value ratio.
  4. It might also be worth noting that whereas the combined profit of Kotak Mahindra and ING Vysya for FY 2013-14 stood at Rs 3,100 crore, the post-merger banking entity is estimated to have assets worth nearly Rs 2 lakh crore and at a workforce of about 40,000 employees.
  5. The merger is set to enhance the lending portfolio of Kotak Mahindra from primarily urban retail to Small & Medium Enterprise (SME) sector, which has been the forte of ING Vysya so far. The expansion of its banking operations to southern states of India and strengthening of assets would attract a greater number of institutional as well as individual borrowers with a rich and diverse profile.
  6. The industry and experts hope this merger to bring a wave of change in the Indian banking industry with possibility of more such acquisitions being announced by top banking brands in the country in near future. This would in turn take the market competition to a higher level and drive the economy ahead in general.

It is to be noted that this acquisition is subject to the approval of respective shareholders of both the banks along with Reserve bank of India and Competition Commission of India apart from other regulatory bodies before the deal can be completed by April 2015. One must keep in mind that while the announcement of the deal has raised high hopes of improvement in banking sector and other positives but it does not come without a number of risks, some of them being the fact that in past such banking mergers have been fraught with serious issues due to strong employee unions, restrictive regulations and a host of other factors. However, one thing is for sure that all eyes would be on the successful completion of this momentous deal and if everything goes right, everyone might have a reason to cheer.