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Business News/ Industry / Kotak-ING deal not to shake dominance of Big Three
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Kotak-ING deal not to shake dominance of Big Three

The new entity is unlikely to expand aggressively or eat into the business of ICICI Bank, HDFC Bank and Axis Bank

The acquisition of ING Vysya Bank will take Kotak Mahindra Bank’s assets to `1.6 trillionPremium
The acquisition of ING Vysya Bank will take Kotak Mahindra Bank’s assets to `1.6 trillion

Mumbai: Kotak Mahindra Bank Ltd’s $2.5 billion (around 15,475 crore) all-stock deal to acquire ING Vysya Bank Ltd has rekindled possibilities of mergers and acquisitions in the banking sector and catapulted the Mumbai-based lender to a clear number four among private sector banks in India.

The deal, however, will do nothing to shake the dominance of the top three private sector banks—ICICI Bank Ltd, HDFC Bank Ltd and Axis Bank Ltd in the foreseeable future, analysts said.

More importantly, the new entity, though bigger and hence more competitive, is unlikely to expand aggressively or eat into the business of its bigger rivals.

Kotak Mahindra, with total assets of 95,430 crore on a stand-alone basis, was behind Yes Bank Ltd’s 1.16 trillion of assets at the end of September. The acquisition of ING Vysya Bank will take Kotak Mahindra Bank’s assets to 1.6 trillion, giving it a sizeable lead over Yes Bank.

The deal has “no material implications" on the banking sector or competition among private banks, said Vaibhav Agrawal, vice-president (research) at Angel Broking Pvt. Ltd.

“Both Kotak as well as ING Vysya are conservative banks. They are risk-averse with a clear focus on the bottom line. In fact, both have been losing market share in the last few years. Yes, this deal gives Kotak branches, more deposits and also some businesses like SME (small and medium enterprises), but it does nothing disruptive to change the top three hierarchy," he said.

Even with the added numbers, the new Kotak Mahindra Bank is half the size of Axis Bank which, with 3.94 trillion in assets and 2,505 branches, is way ahead.

Kotak Mahindra Bank will have around 1,200 branches after the purchase of ING Vysya.

The combined entity will not pose serious competition to its bigger rivals and will have little impact on their business strategies, said Rajiv Mehta, an analyst at IIFL Holdings Ltd.

“Banks like ICICI Bank, HDFC Bank or even Axis are all pan-India franchises and still growing. The only thing that will change is these larger banks would now have to compete with Kotak in smaller towns or other cities just like they were in Mumbai or Delhi, so in that sense they will face tougher competition, but the big guys are used to it by now," he said.

The deal allows Kotak to achieve its 1,000 branch target for 2016 two years ahead of schedule. It gives the bank a wider reach, particularly in southern India.

Mehta pointed out that the last few years of rapid growth of new-generation banks like Yes Bank and IndusInd Bank Ltd has done nothing to temper the growth of larger peers.

“In a sense any change because of competition has been difficult to show on the ground in the Indian banking sector. One reason for that is because this is a huge market which is underpenetrated, leaving enough space for everyone to grow," he said.

Perhaps any change in the overall banking sector will be by way of sentiment.

The deal could push other banks to consider acquisition opportunities within the smaller private sector bank space, said S. Ranganathan, head of research at broking firm LKP Securities Ltd.

“At two times the book value, this is a fair deal and to think that the bank acquired was a well-run one means that this can be done with other banks as well which are not doing that badly. This opens new doors to companies wanting to set up banks or even banks like Axis, which may be ready for acquisitions," he added.

To be sure, while there is no indication of further consolidation within the sector, shares of smaller banks thought to be potential acquisition candidates surged on Friday.

Among the gainers was South Indian Bank Ltd, which ended 5.48% higher to close at 27.90, after being up 7.75% at one stage. Dhanlaxmi Bank Ltd gained 2.31% to 44.20 after rising as much as 7.18% and Karnataka Bank Ltd advanced 5.07% to 143.05 after being up 7.01% at one stage in intra-day trading.

ING Vysya Bank gained 0.32% to 816.80 after rising 4.27% in intra-day trading, while Kotak Mahindra increased 3.68% to 1,199.65 after rising 8.98% earlier.

The broader BSE Bankex gained 2.37% to close at 20,683.54 points. BSE’s benchmark Sensex rose 0.95% to close at 28,334.63 points.

Mehta of IIFL said the deal signifies that this probably is the “right time to get aggressive".

“ING Vysya was a good bank, but don’t forget that this deal happened at a time when there has been a trough in the credit cycle. This could spur smaller private sector bank promoters to consider mergers," he added.

Credit growth, currently at 11.2%, is at a five-year low as corporate demand for loans has slackened. The banking sector is also weighed down by non-performing assets (NPAs) after two years of sub-5% economic growth.

Ranganathan of LKP Securities said this could be the change in sentiment the sector needed. “Everyone was fed up with the low credit growth and high NPAs. This deal could change that," he added.

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Published: 21 Nov 2014, 11:55 PM IST
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