Is there any upside in the speculative Kotak Bank-Federal Bank merger?

However, it fell by 15% in June 2022 and returned to the 51,000 level, only to jump back to 60,000 by August 2022.

While broad market returns averaged about 12%, best bank stocks in india Took charge and outperformed BSE Sensex.

The banking index averaged 20%, outperforming the broader markets by 8%. This performance comes from periods of high business growth, rising rates, which are supportive margins, and mild asset quality.

If history tells us anything, it’s that some of the best returns in banking stocks have come post-bank mergers.

And so, this brings us to the highly anticipated merger between Kotak Mahindra Bank and Federal Bank.

Even though Federal has denied media reports that it is in talks with Kotak for a merger and Kotak has not denied or confirmed, we see how valuable this merger could be.

A good start is to look at the total assets and liabilities that the merger will bring to the table.

1. Generally, banks face stiff competition for customer deposits, with over 30 lenders serving nearly 80% of Indians who have access to basic savings accounts. But Kotak has always struggled to grow organically.

Hence, the acquisition/merger of another business would be a huge positive for the private lender. The potential merger could double Kotak’s total deposit base. This will make Kotak an unstoppable player in the banking sector. The proposed new entity will be the third largest in the Indian private banking sector.

1. The valuation of Kotak is very good. Therefore, any merger, especially with a regional player like Federal Bank, can add more value to the business. Moreso, given Federal’s southern performance in this matter. However, any value accrued to its shareholders will be a function of the merger swap ratio as decided by the banks.

While 30% of Kotak’s branches are in the southern region, Federal has over 69% of its branches there. After the merger, Kotak will enjoy a wide network across the country.

The existing branch numbers of Federal Bank will add 75% to Kotak’s total number. While Federal Bank operates 1,300 branches, Kotak operates around 1,700 branches.

However, technological advances have made physical banking redundant. With physical banking being preferred, this measure is of little use to understand the price rise.

1. A better way to judge is by analyzing the combined capacity of the two banks. Bank’s ability to not only lend, but to lend responsibly.

return ratio and asset quality

Data Source: Annual Report 2022

While both the companies claim healthy return ratio and maintain adequate capital buffer, Federal Bank has higher NPAs than Kotak. If this number rises, the proposed merger could be in jeopardy.

How do we know that mergers are value addition for the minority investor?

A look at recent history provides all the evidence we need.

If you look at the mergers and acquisitions of private banks, you will see how much value they have created for the shareholder.

• HDFC Bank – Times Bank in 2000
• HDFC Bank – Centurion Bank of Punjab in 2008
• ICICI Bank – Bank of Rajasthan in 2010
• Kotak Bank – ING Vysya 2014

Most of these mergers have generated increased returns for their shareholders within two years. Hence proving that the merger has resulted in better shareholder returns in the banking sector.

in conclusion

When it comes to mergers and acquisitions in the banking sector, the number of branches or employees does not matter.

What matters is whether the banks’ strengths are complementary and if together they can increase shareholder returns.

While the strengths of the two banks are complementary, the merger can be a value-add to the banks’ shareholders. over the long term,

Happy investment!

Disclaimer: This article is for informational purposes only. This is not a stock recommendation and should not be treated as such.

This article is syndicated from equitymaster.com

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