Mumbai: Kotak Mahindra Bank Ltd is in talks with Citibank NA’s Indian management for a possible acquistion of the latter’s troubled consumer finance arm CitiFinancial Consumer Finance India Ltd (CitiFinancial) that gives home and personal loans to retail borrowers in the low income segment.
The Indian lender, one of a new generation of private sector banks, is conducting due diligence on CitiFinancial’s assets, said an investment banker, who didn’t want to be named. Due diligence is an evaluation of a target company and its assets that a potential acquirer undertakes before a purchase.
Retail focus: Kotak Mahindra Bank’s vice-chairman and managing director Uday Kotak. Abhijit Bhatlekar/Mint.
A Kotak Mahindra Bank executive told Mint that talks between the banks were “currently at a very, very preliminary stage” and “general” in nature. The executive spoke on condition of anonymity.
CitiFinancial has been reeling under bad loans and lossess since 2007. The losses largely accrued because of higher delinquencies in unsecured personal loans. CitiFinancial reported a net loss of Rs729 crore in fiscal 2009 against a profit of Rs19 crore in the previous year.
Arun Raste, head of group corporate communications at Kotak Mahindra Bank, said in an email: “The news is purely speculative, and, therefore, we have no comments to offer on the same.” Responding to an email query from Mint, a Citi India spokesperson said: “As per policy, we do not comment on speculation.” Mint has not been able to ascertain the potential valuation of CitiFinancial. If indeed the deal goes through, Kotak Mahindra Bank will add about 118 branches and 2,000 employees to its network, out of which 800 are certified professionals authorized to sell insurance products.
Kotak Mahindra Bank, with an asset base of Rs37,439 crore, has 249 branches across 145 locations and 492 automated teller machines. ICICI Bank Ltd has 2,000 branches, HDFC Bank Ltd 1,725 branches and Axis Bank Ltd at least 1,000 branches, although they have been around longer than Kotak Mahindra.
Hit hard by the global financial crisis of 2008, Citigroup Inc. reorganized its business in 2009 to transfer non-core businesses such as its retail brokerage, consumer finance and asset management to Citi Holdings. The businesses were separated to enhance future earnings and streamline the organization. CitiFinancial is part of Citi Holdings.
Mark T. Robinson, former chief executive officer of Citi South Asia, in an interview with Mint last year had indicated that Citi could realize value from CitiFinancial through multiple options—an outright sale, a partnership or an initial public offering.
According to a former Citibanker who didn’t want to be named, “irrational lending, loose underwriting norms and ample liquidity” in the market had led to problems for the consumer finance arm, which had been growing aggressively since 2000 following Citi’s global acquisition of Associates First Capital Corp. in the US. CitiFinancial began its Indian operations in October 1997. Currently, it is focusing on diversifying its revenue streams through sale of investment products, personal loans and mortgages.
Two years ago, Citi appointed Rahul Soota as managing director of CitiFinancial to lead a remodelling and repositioning exercise, and diversify its revenue sources across personal loans, mortgages and wealth management. Soota moved to Citibank in April to head its retail and commercial banking business.
The management has also cut the branch network from 450 to around 118, retrenched at least 400 staff and infused $200 million (Rs906 crore today) in the past two years.
“There was no taker for CitiFinancial as the quality of its portfolio was suspect, but in the past two years CitiFinancial has cleaned up its books,” said the chief executive officer of another private bank, who did not want to be named.
Sailav Kaji, director (institutional equities) at Fiduciary-Euromax Capital Markets Ltd, a Mumbai-based brokerage, said the prospective purchase of CitiFinancial would be a good deal for Kotak Mahindra Bank.
“Kotak is looking to expand. In the past couple of years, when others like Yes Bank Ltd were expanding aggressively, Kotak remained subdued. Citi has pumped in capital in the non-banking arm to absorb the losses,” he said.
The US bank, however, is unlikely to continue putting money into a non-core business it wants to get rid of.
An acquisition of CitiFinancial is also in conformity with Kotak Mahindra Bank’s strategy of expanding retail assets. A report by PTI on Tuesday quoted Uday Kotak, vice-chairman and managing director of the bank, as saying it will focus more on sectors such as auto, housing and construction finance that offer higher growth potential. Corporate loans currently make up nearly two-thirds of the bank’s total loan book.
Kotak Mahindra Bank’s net profit rose 97% to Rs203 crore for the quarter ended March. The bank’s shares rose 3.1% on the Bombay Stock Exchange on Wednesday to close at Rs768.40 apiece even as the exchange’s bellwether Sensex index edged up 0.32% to 17,195.81.