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Big Bank Theory: Kotak-IndusInd deal – Fire? Smoke? Smokescreen?

Friday, Oct 30, 2020

 

Uday Kotak's reputation as a dealmaker and Kotak Mahindra Bank's capital war chest means it is often in the news as a potential acquirer. The bank has said it is open to inorganic growth, but does a merger with another bank make sense? 

 

By T. Bijoy Idicheriah

 

"We didn't start the fire
No, we didn't light it
But we tried to fight it"

– Billy Joel

 

The room was full of expectations and media was waiting to be part of an announcement that would make banking history. For a week the headlines had been about who will Kotak Mahindra Bank acquire? 

 

Names flew thick and fast. Mahindra Finance was the sure-fire bet, headlines said.

 

'Minor' details like the fact that the board meetings of the bank and target entities were not scheduled before the press conference, were lost in the headline frenzy. 

 

And then the bank's founder and Managing Director and Chief Executive Officer Uday Kotak announced the '811' digital account. 

 

That was March 2017.

 

But, one could have told the same story in 2018 and replaced Mahindra Finance with Axis Bank, or in 2019 with YES Bank. In 2020, it is IndusInd Bank.

 

The top management of Kotak Mahindra Bank, to their credit, have been consistent that they are open to inorganic growth opportunities and have built up a war chest for it. However, the 'no comment' from Kotak Mahindra Bank on reports that is looking at acquiring IndusInd Bank have only fanned the flames.

 

There is a good reason why Kotak Mahindra Bank has always been linked with acquisitions–it has successfully merged ING Vysya Bank with itself in 2014 and acquired microfinance player BSS Microfinance in 2016. These were crucial in the bank's journey to expand into regions and sectors where it was not present and also to help promoters to bring down stake in line with regulatory requirements. 

 

Most importantly, before these deals happened, there was no speculation that they were in the offing. 

 

But, this leaves many of these alleged targets in a tough spot. 

 

Just sample this statement from the IndusInd Bank promoters last week. The bank called it "malicious, untrue and baseless". 

 

IndusInd Bank is known for its strong corporate book, and large presence in financing commercial vehicle and construction equipment space. Over the last year, there have been some concerns on lending to corporates and capital. With a new chief executive in place, the bank is looking at a more retail-centric offering. 

 

Kotak Mahindra Bank, thanks to past acquisitions, has a much broader canvas of customers in retail but retains a strong corporate loan book. It already has expertise in the vehicle loan space through Kotak Mahindra Prime, which is a non-bank lender within the group. As a financial services conglomerate, Kotak Mahindra Bank has a greater opportunity to leverage on them to expand beyond just providing banking services to the customers. 

 

On paper, a marriage of the two sounds good, but there are too many overlaps in terms of customer base and also areas of operations for it to make sense. 

 

The real question will be whether Kotak Mahindra Bank can achieve what it wants to do organically rather than do an acquisition that will cause transition pain for years?

 

A good blueprint would be to see what HDFC Bank did; it acquired Times Bank, followed by Centurion Bank of Punjab, but has stayed away from inorganic growth since 2008. Instead, it has heavily added branches in semi-urban and rural areas, and hired local staff there while ramping up technology along with strategic tie-ups for business correspondents. 

 

With technology ubiquitous to banking in India today, with branches or business correspondents playing more of a support role, does a merger really yield value to a player like Kotak Mahindra Bank?

 

Wouldn't it make more sense for the bank to look at liquidity or capital starved non-bank finance companies in areas that it wants to enter and make a play for those, rather than go for a merger with a large bank that must pass through multiple layers of regulatory and supervisory scrutiny?

 

Will a merger at this point really make sense when the COVID-19 pandemic is already leading to many lenders consolidating their operations, which enables a well capitalised bank like Kotak Mahindra Bank to be better placed to grab market share when lending takes off over the next few months? 

 

But, as most people who are associated with Kotak Group point out the past acquisitions were always done at a price point where Kotak Mahindra Bank found value. Uday Kotak is known to be a smart dealmaker, and has been adamant at bargaining a good deal. 

 

IndusInd Bank or any other name pulled out of the hat may be targets for Kotak Mahindra Bank or they may not be, but if past history provides a clue, it is unlikely that a deal by Uday Kotak will be first reported in the media.

 

"We didn't start the fire
It was always burning
Since the world's been turning

We didn't start the fire…"

End

 

(When he's not breaking a leg on stage, he's breaking news and views on banks and regulatory issues. In Big Bank Theory, Assistant Editor (Money) T. Bijoy Idicheriah talks shop on matters that matter to the sector.)

 

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