The proposed swap ratio in the Kotak Mahindra Bank (KMB) and ING Vysya Bank (VYSB) merger, of 725 shares of KMB per 1000 shares of VYSB implies a P/B multiple of nearly 1.9x FY16E, which is close to our target multiple for VYSB.
The deal offers multiple synergies on both assets and liabilities and the extended branch network of 1,214 branches postmerger offers a larger distribution platform. If the merger is approved at the current swap ratio, it could lead to a c.27% increase to our FY17 BVPS estimate for KMB (standalone).
We roll over our valuation for KMB to FY17E and marginally reduce our target multiple to 3.4x (from 3.9x) to adjust for the lower RoE of ING Vysya Bank to arrive at a face value (FV) of R1415 (from R1,140). We also roll over our FV of ING Vysya to reflect the rollover of KMB and arrive at a FV of R1,015 (from R890). We reiterate buy on Both Kotak Mahindra and ING Vysya.
We keep our estimates broadly unchanged for both ING Vysya and Kotak Mahindra and introduce FY17E estimates for both companies. Given the swap ratio of 725 to 1000, we estimate the BVPS of Kotak (Standalone) postmerger to increase to R326. Because of the huge differential in the multiple at which ING Vysya and Kotak trade, the merger is leading to a nearly 29% and 27% increase in our FY16E and FY17E BVPS estimate for KMB (standalone).
Espirito Santo
