The ING deal looks like a winner
For all the angst about mergers and acquisitions in the banking space, both HDFC Bank, which bought over Centurion Bank in 2008, and ICICI Bank, into which Bank of Rajasthan was merged two years later, have emerged unscathed. Neither the Centurion Bank nor the Bank of Rajasthan were in good shape, which only proves that a strong and competent management can sort out even a big mess. That is probably why the Street has shrugged off concerns of conflicting corporate cultures at Kotak Mahindra Bank (KMB) and ING Vysya Bank which announced on Thursday evening they would be merging to form a bigger bank with a balance sheet size of just under R2 lakh crore.
Indeed, that the combined entity is currently being valued at roughly the same levels as Axis Bank even though the latter’s profits are twice as large, speaks volumes for how confident investors are KMB will be able to make ING’s business as profitable as its own. The Street has given the deal a thumbs up not just because it’s been done at a very attractive valuation of 2.3 times book value but also because of the strategic fit that ING is for KMB. To start with, KMB gets a branch network, almost as big as its own but more importantly one that has a very large presence in the south. Given KMB’s own network is stronger in the west which accounts for 46% of the branches, the combined reach will be a pan-India one. As such, diluting the bank’s equity capital—the transaction will happen via a share swap in which ING shareholders will get 725 shares of KMB for every 1,000 held—for a near 100% increase in the branch network is good going.
ING also brings with it a loan portfolio that has a very big exposure of 38% to the SME sector which perfectly complements KMB’s asset book that is composed of a relatively high share of retail loans. In fact, many believe the large SME customer base is a game-changer for Kotak at a time when the economy is coming out of the slowdown of the past few years. After all, smaller banks—the merged entity will be the fourth largest private sector bank—do have a hard time breaking into consortium that cater to bigger corporate clients. The new entity’s strongly capitalised balance sheet—capital adequacy ratio of 16.5%—can be put to work to expand the business locally even as ING’s clout in Europe will help grow other lines of business. To be sure, there will be teething troubles—the fact that the two banks work on different technology platforms will mean the integration could take a little longer. But, that aside, this is one merger that should work.