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Time ripe for Kotak to move on mergers

15 April, 2018 4:34 PM
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Asia’s richest banker has a rare chance

Uday Kotak has a rare opportunity to scale up. Asia’s richest banker has long had an eye on Axis Bank. Now, a leadership void could make it easier to forge a union with his own Kotak Mahindra to create a $54 billion Indian banking giant.

A deal would allow the tycoon to lead consolidation and help him meet new ownership limits without selling shares.

The $20-billion Axis is one of the few Indian banks without a dominant investor. It needs a new boss following Shikha Sharma’s surprise decision this week to cut short her tenure, having led the bank since 2009.

A year ago, Mr. Kotak had expressed interest in buying a stake in Axis, presumably as a stepping-stone to a full takeover. The market capitalisations of the pair have diverged since, with Kotak Mahindra shares running well ahead. Axis has twice the assets but also more than twice the gross bad loans, as a proportion of total lending.

This ratio has risen to 5.3% after the regulator forced it to recognise more. The upside is that there are unlikely to be many more skeletons in the closet.

The top prize is a chance to be an industry leader, rapidly growing branches, deposits and credit card customers. It would also help Mr. Kotak, with a fortune estimated by Forbes at $11.4 billion, reduce his shareholding to meet regulatory requirements.

An all-share deal at the current values would give Kotak Mahindra around 60% of the enlarged entity, of which the tycoon would own 18%. That is below the 20% threshold he must hit by December 2018. In reality, Axis shareholders would probably be offered a premium, meaning slightly lower stakes for Mr. Kotak and his fellow Kotak Mahindra shareholders in the combined entity.

Mr. Kotak believes consolidation is inevitable, so getting larger will ensure his bank is a survivor. Its richly-valued shares trade on around 3.7 times forward book value, almost double that of Axis. That puts Kotak Mahindra Bank in a strong position to buy without diluting its own shareholders too much. The tycoon could also take a look at the $29-billion ICICI Bank, whose boss is struggling to contain the fallout of an alleged loans scandal. There might never be as good a time to buy a large bank as now.

(The writer is a Reuters Breakingviews columnist. Opinions expressed are her own)


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