India’s lending opportunity is too good to miss. A mooted merger of Axis Bank and Kotak Mahindra Bank would create a $44 billion giant, the country’s second-largest lender by market value after HDFC Bank. That would create a strong institution well-positioned to capitalise on any credit boom. Uday Kotak, the billionaire owner of the $25 billion bank bearing his family name, says he would consider buying New Delhi’s 11.5 percent stake in Axis if it were sold. He has also said a planned fundraising could aid acquisitions. That has fuelled speculation he wants a deal with the partly state-backed rival despite Axis insisting that talk of a union is baseless.
An all-share deal would allow the tycoon to take a smaller stake in a larger entity, and meet rules requiring him to cut his shareholding from around 33 percent to 20 percent by the end of next year. He also believes consolidation is inevitable. So getting larger helps ensure the bank will be a survivor. The attraction of any deal would not be about cost-cutting but growth, through offering a bigger suite of products in a wider network. Axis has a big presence in corporate term lending, for example, which Kotak Mahindra does not. The bad-loan crisis crippling state banks explains why most private-sector lenders avoided that segment, favouring personal loans and mortgages instead, or safer corporate services like transaction banking. But when the next credit cycle sours, protection for creditors should be stronger thanks to a new bankruptcy code.
Indian credit growth is anaemic but confidence in the economy is building and state banks will remain distracted and weak even if they are bailed out. That leaves a huge opportunity, and explains why investors like Blackstone are now venturing into the private debt market. Valuation will be key to any tie-up, of course. Kotak Mahindra trades on almost four times forward book value, twice the valuation of Axis. The latter has almost three times the assets, but a much higher ratio of bad loans. If the love of loans is strong, India could yield a new banking giant. On Twitter http://twitter.com/ugalani
– Uday Kotak, executive vice chairman of India’s Kotak Mahindra Bank, said his board would look at the merits of buying the government’s 11.5 percent shareholding of rival Axis Bank if it were up for sale. – “We want to grow in the financial sector and we want to grow sensibly”, he said in an interview with the Economic Times published on April 5, adding that the bank would use proceeds from a planned share sale to fund potential acquisitions, among other things. – On April 2, Kotak told Press Trust of India his bank was open to “change that is bold and can be game-changing” and that, in the long-term, he envisioned only three to five large banks in the country. India has seven major private-sector banks.