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Business News/ Companies / News/  Kotak Mahindra Bank to acquire ING Vysya in all-stock deal
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Kotak Mahindra Bank to acquire ING Vysya in all-stock deal

The combined entity will have advances of `1 trillion and a deposit base of `1.13 trillion

A share swap ratio of 725 shares of `5 each of Kotak Mahindra Bank for every 1,000 shares of `10 of ING Vysya Bank has been approved by the board, Kotak Mahindra Bank said in a stock exchange filing. Photo: MintPremium
A share swap ratio of 725 shares of `5 each of Kotak Mahindra Bank for every 1,000 shares of `10 of ING Vysya Bank has been approved by the board, Kotak Mahindra Bank said in a stock exchange filing. Photo: Mint

Mumbai: Kotak Mahindra Bank Ltd is acquiring ING Vysya Bank Ltd in an all-stock transaction that will create India’s fourth largest private sector lender with nearly 2 trillion of assets and 10 million customers.

The deal entails the swap of 725 Kotak Mahindra shares for every 1,000 shares in ING Vysya. It has been struck at a 16% premium to the one month-average share price of ING Vysya, valuing the lender at $2.5 billion and making it the biggest bank acquisition in India.

The transaction will create a lender with 1,200 branches and a combined deposit base of 1.1 trillion. The combined entity will be the largest private sector lender in India by assets after ICICI Bank Ltd, HDFC Bank Ltd and Axis Bank Ltd.

“We had a target of building 1,000 branches by 2016 and this deal enables us to achieve it more quickly," said Uday Kotak, executive vice-chairman and managing director of Kotak Mahindra Bank. “Kotak will get access to ING Vysya’s SME (small and medium enterprises) business which is its strength. We will also learn from their digital banking. The focus will be on cost efficiency and not cost-cutting."

The acquisition of Bengaluru-based ING Vysya Bank, in which Dutch lender ING Groep NV owns a stake of around 43%, is expected to give Kotak Mahindra a wider reach, particularly in the southern parts of the country, while also bringing with it the benefits of scale.

The acquisition is the first in the country’s banking sector in four years; the last was ICICI Bank’s purchase of Bank of Rajasthan in 2010. HDFC Bank acquired Centurion Bank of Punjab Ltd in 2008.

“The deal is being done at 2.1 times ING Vysya’s book value. If you look at the last six-month trading average, this would mean a 30% premium. There is no cash component involved," said an investment banker close to the deal. The banker spoke on condition of anonymity.

S.R. Batliboi and Co. and Price Waterhouse and Co. Llp acted as independent valuers for Kotak Mahindra and ING Vysya respectively, a joint statement by both banks said. Avendus Capital Pvt. Ltd provided a fairness opinion to Kotak Mahindra Bank and Edelweiss Financial Services Ltd provided one to ING Vysya Bank.

“There are significant complimentaries in merger in terms of geographical spread, business segments, client segment and cross-border business. Operating metrics of the combined entity will be much better than current," said Vikas Khemani, chief executive (wholesale capital markets) at Edelweiss Financial Services.

A key benefit of the deal for Kotak Mahindra will be the wider reach it will gain, particularly in southern India. Until now, 80% of the bank’s branches have been concentrated in the west and the north, while only 15% were in the south. ING Vysya has 64% of its branches in the south.

“The synergy of the branches is phenomenal. We see virtually no area in the network and distribution that is excessive," said Kotak.

As on 30 September, ING Vysya Bank had 39,558 crore in advances and 44,652 crore in deposits.

Kotak Mahindra had 81,418 crore of advances and 66,311 crore of deposits. Low cost deposits (current accounts/ savings accounts) accounted for roughly 33% of ING’s deposit base and about 29% of Kotak Mahindra Bank’s.

While the merged entity would be far stronger in terms of network, the consolidation may lead to some dilution in the return on assets (RoA) and return on equity (RoE), given ING Vysya has a lower RoA and RoE.

The gross non-performing asset ratio of both ING Vysya Bank and Kotak Mahindra Bank was 1.59% at the end the September quarter.

“There will be two issues to keep in mind while merging the two entities—one will be the quality of the book and second will be the cultural fit. I am sure the quality of the book would have been taken into account during the diligence process but there will be considerable cultural differences between the two banks which will need to be ironed out," said Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services Llp, a banking consultancy.

Following the transaction, Uday Sareen, CEO designate at ING Vysya, will join the senior management team at Kotak Mahindra Bank. One other executive from ING Vysya will join the board of Kotak Mahindra Bank.

The shareholding of the combined entity will also change and help Kotak Mahindra Bank bring down the promoter’s stake to 34% from the current level of 40%.

In May, the Reserve Bank of India (RBI) asked Kotak Mahindra to lower its promoter holding to 30% by December 2016. Dutch group ING will hold a 6.5% stake in the merged entity, which is in excess of the 5% holding permitted for any single investor in a bank.

The overall foreign holding in the bank will also rise to 46.9%, compared with the current board-approved limit of 40%. According to Uday Kotak, the bank will approach RBI on both these issues.

ING’s move to sell its banking franchise has been long rumoured; the parent bank has been pulling back from a number of markets. In 2013, ING exited its life insurance business in India. In May this year, ING sold its asset management business.

“ING wanted to move out of the India business because the higher capital requirements in its home market created a burden on it here. It sold to reduce its capital burden," said a person familiar with the transaction on condition of anonymity.

According to Sareen, the deal will give employees at the ING Vysya Bank more growth opportunities.

“ING’s diverse customer segment and customers will have access to Kotak products. Kotak will also get the large ING network with 800 clients across Europe," Sareen said

While the deal was announced after the markets closed, shares of both banks surged in Thursday’s trading.

Shares of Kotak Mahindra Bank gained 7.28% to 1,157.05 on the BSE, while shares of ING Vysya Bank rose 7.15% to 814.20. The benchmark Sensex advanced 0.12% to 28,067.56 points and the Bankex gained 0.37% to 20,204.71 points.

“The merger is book value and EPS (earnings per share) accretive and thus Kotak stock will also look good. It brings a strong SME portfolio into Kotak’s lap, while deposit profile of both banks are pretty similar. Considering the merger happened at nearly two times the price to book value and that previous mergers have been much more expensive than this, we feel it is a good deal," said Nitin Kumar, banking analyst with Prabhudas Lilladher Pvt. Ltd.

The deal between Kotak Mahindra Bank and ING Vysya may spark hopes of wider consolidation in the banking sector, although bank mergers have been few and far between. A number of older private sector banks like Federal Bank Ltd, South Indian Bank Ltd and Catholic Syrian Bank have been considered merger candidates in the past. Consolidation among public sector banks has been limited to mergers of weak banks with stronger ones at the behest of RBI.

“The good thing is that we are starting to see some voluntary consolidation. But if you are talking about wider consolidation involving the public sector banks, that still seems like a distant possibility," said Parekh.

Malvika Joshi contributed to this story.

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Published: 20 Nov 2014, 06:11 PM IST
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