Amid reports of a potential merger between Federal Bank and Kotak Mahindra Bank, global brokerage house CLSA said that the merger would be materially accretive if it at all happens.
In a 'what-if' report, the brokerage predicted that even if Kotak pays a premium, this potential merger could boost Kotak Bank's earnings per share (EPS) by 12 percent and its book value per share by around 16 percent.
"Fundamentally, regional banks are strong liability franchises in their micro markets, and in Kotak's case we have highlighted it would need to increase liability mobilisation with its strong growth ambitions, and hence a merger would be positive," the brokerage explained.
Earlier this month, media reports said that both private lenders were in initial discussions for a merger, however, neither of the lenders have confirmed any such speculations.
“We would look at Kotak more favourably if it is able to add to its liability strength through inorganic routes,” CLSA said, adding that Federal Bank’s net worth/PAT in FY22 and consensus numbers for FY23/24 are 24-25 percent of Kotak bank
It further estimated that the dilution in Kotak Bank’s stock price at the current prices would be 7 percent and even assuming a 20-40 percent premium for Federal Bank, the dilution would still be less than 10 percent.
"We estimate the deal to be 13-16 percent earnings/book accretive for Kotak even after factoring in some material premium,” noted the brokerage.
CLSA also pointed out that Kotak's loan growth prospects remained strong at more than 20 percent annually over the next three years but India's third largest private sector lender faced challenges in mobilising deposits.
In the June quarter, Kotak Bank reported a 10.2 percent YoY growth in deposits at ₹3.16 lakh crore while Federal Bank reported an 8.2 percent YoY growth to ₹1.8 lakh crore, of which 94 percent were retail deposits.
Meanwhile, Federal Bank operates 1,300 branches with low overlaps with those of Kotak Bank and its current deposit base would materially boost Kotak Bank’s overall deposit base, highlighted CLSA. The highly unionised labour force of Federal Bank, however, could pose challenges in terms of integration and improving efficiency levels, it cautioned.
“Also, unlike ING Vysya, share ownership of Federal Bank is dispersed but investors should be fine with owning Kotak Bank’s shares assuming they receive a premium in a merger,” the brokerage firm said.
The brokerage has an outperform rating on Kotak Bank with a target price of ₹1,918.25. In 2020 so far, it has risen 7.5 percent while Federal Bank has advanced 43 percent in this period. In comparison, the Nifty Bank is up 15 percent in 2022 YTS while the benchmark Nifty has added 4 percent.
Incorporated in 1931, Federal Bank is a mid-sized private bank headquartered in Aluva, Kochi. The bank has nearly 1,300 branches spread across the country as well as representative offices abroad in Abu Dhabi, Qatar, Kuwait, Oman, and Dubai. The bank’s total business mix (deposits + advances) stood at ₹3.35 lakh crore as on June 30, 2022.
In the June quarter, Federal Bank reported its highest ever quarterly profit at ₹600.66 crore, up 63 percent YoY from ₹367.29 crore reported in the same quarter last year. Its net interest income rose 13 percent YoY to ₹1,605 crore versus ₹1,418 crore in the corresponding period last year. Meanwhile, its net interest margin stood at 3.22 percent for Q1FY23.
On the other hand, Kotak Mahindra Bank is India's fourth largest private sector bank by assets and by market capitalisation. In February 2003, Kotak Mahindra Finance received a banking license from the Reserve Bank of India (RBI), becoming the first non-banking finance company in India to convert into a bank. As on June 30, 2022, Kotak Mahindra Bank has 1,702 branches and 2,761 ATMs in India.
In the June quarter, Kotak reported a 26 percent YoY rise in its net profit at ₹2,071 crore compared with ₹1,642 crore in the same quarter last year. Its net interest income rose 19 percent YoY to ₹4,697 crore compared with ₹3,942 crore in the same quarter last year. Net Interest Margin (NIM) for the quarter for the lender came in at 4.92 percent.