Kotak Mahindra Bank-ING Vysya deal: Uday Kotak’s measured move

ING Vysya Bank brings with it both a complementary branch network and asset book

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Uday Kotak has not been known to fritter away cash or goodwill; the vice chairman and managing director of Kotak Mahindra Bank is conservative to the core. Never one to rush into anything, even the smallest signs of a slowdown makes him cautious. Which is why when in 2009, post the Lehman crisis, he decided it was best to hunker down and not grow the bank’s retail book at the pace others were; it turned out he was right because most banks were left holding assets that were worthless. In early 2010, the group’s life insurance business had a market share of barely 2% and the business was de-growing but Kotak was unperturbed, he wasn’t about to run up losses at a time when the environment was clearly not conducive.

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It might seem surprising then that KMB has bought out ING Vysya Bank in what is probably the largest banking M&A deal in the country—with shareholders of ING to get 725 shares of every 1,000 shares they hold, the deal is valued at approximately $2.5 billion. Especially since the corporate cultures at the two banks are very different as are the technology platforms on which they operate and also because ING Vysya is a less efficient lender. However, Kotak is aware of the benefits that a lender like ING Vysya can bring and being a marathon runner he is, is willing to use them to grow KMB. He’s clearly aware it won’t happen overnight and has tempered the Street’s expectations but he’s willing to dilute the bank’s equity by 15% because he believes he’s getting more in return. Indeed, at a valuation of just 2.2 times book value, Kotak has cut himself a sweet deal given ING Vysya’s business and branch network complement KMB’s in more ways than one.

While ING has a large presence in southern India, KMB’s reach is bigger in the west and together the 1,214 branches are more or less evenly spread out across the country, save the east. The bigger plus for KMB, which has always had a strong retail franchise driven by its expertise in the capital market space, however, is the SME portfolio that it gets from ING where such loans contribute 38% to the total assets. The exposure to SMEs, at a time when the economy, is coming out of a trough, could be a game changer especially since it’s not easy to break into consortiums of AAA borrowers.

Interestingly, in an interview to FE in March, 2010, almost five years back, Kotak had said while he wouldn’t throw away money on an acquisition, he would love to own a strong liability franchise. ING’s deposits of R44,652 crore are smaller than KMB’s kitty of R66,311 crore but the CASA content at 32% is equally strong and it doesn’t pay 6% for savings accounts. On balance, the ING buy looks like a sound purchase, money well spent.

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