The jury is still out on Kotak Mahindra Bank Ltd’s merger with ING Vysya Bank. Yes, it has outperformed the Bankex this fiscal year, but its estimated price-to-book multiple is down to 3.7 times from the heady 5 times-plus a year or so ago.

That’s not surprising because not only are there integration-related costs, asset quality was also expected to worsen a bit post merger. The bank’s gross bad loans ratio was 2.3% at the end of December compared with 1.87% a year ago.

The impact of the merger was particularly felt in provisions, which increased by a third sequentially and by over seven times from a year ago. A significant portion of this was from the ING Vysya Bank portfolio, including those on security receipts and credit substitutes, the bank said in a statement.

To be sure, an increase in G-sec yields last quarter would also have resulted in an increase in the mark-to-market provision on such securities.

Kotak also reported that its standard restructured loan portfolio was 346 crore, of which 202 crore was from ING Vysya Bank. But there were no sales to asset reconstruction companies or 5/25 scheme repricing of loans. Overall, the management stuck to its credit cost estimates of 80-85 basis points this fiscal year, which is still more than double the 30 basis points for FY15. A basis point is 0.01%.

The bank so far has totted up expenses of 142 crore for the integration, which is likely to be completed by April or May.

Its stand-alone loan book (including ING Vysya) grew 3.3% from a quarter ago, a tad above the 2.4% growth for the industry. This growth was driven mainly by the corporate segment.

That said, Kotak’s subsidiary businesses boosted its consolidated numbers. Its aggregate loan book (including Kotak Mahindra Prime Ltd) grew 4.8% sequentially. Barring Kotak Securities, all the other divisions reported a year-on-year increase in profits. The combined net profit of the non-bank divisions (before considering minority interest and shares to affiliates) rose 23% from a year ago.

Investors would, however, continue to watch how smoothly the integration proceeds and how Kotak’s profitability and return ratios bounce back to near pre-merger levels. In the meantime, any news on monetizing its insurance business after loosening of foreign direct investment limits could act as a trigger for the stock.

The writer does not own shares in the above-mentioned companies.

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