Axis’ Merger With Kotak Mahindra Bank A Positive If It Happens, Says BofA ML

sketches.server.rss_feed$yahoo_hero_image@33b5fa41

Kotak Mahindra Bank Ltd. stands to benefit the most from the “speculated” merger with Axis Bank Ltd., according to report by Bank of America Merrill Lynch (BofA ML).

Batting for consolidation in India's banking sector, the report said that among all the contenders eyeing a stake in Axis Bank, the best suited would be Kotak Mahindra Bank.

Earlier this month, various news articles suggested that Kotak Mahindra Bank had approached the government seeking to buy a stake in Axis Bank. Other private banks like ICICI Bank Ltd., HDFC Bank Ltd. and IndusInd Bank Ltd. have also shown an interest, according to some news articles. Axis Bank denied all such speculation terming them “baseless and unsubstantiated” while Kotak Mahindra Bank refused to comment.

According to the BofA ML report, any such consolidation will aid the earnings per share (EPS) of the Uday Kotak promoted-financial lender.

Bank of America Merrill Lynch ReportEPS accretive benefits would exist only for a potential combination with Kotak Bank, in our view.

Also Read: Why Uday Kotak May Stay Away From Axis Bank

The report estimates that a merger between Kotak and Axis would boost the former's standalone EPS by Rs 5.8. On a consolidated basis, the number would increase by Rs 2.1.

For ICICI Bank, a potential merger with Axis Bank would be EPS dilutive as both face similar asset quality challenges. IndusInd Bank’s EPS would improve only marginally after the merger, while for HDFC Bank it would be slightly EPS dilutive.

From a shareholder's perspective though, a merger may not bode well.

According to the report, none of the banks in contention for a potential merger, would see an improvement in the return on equity (ROE) after merging with Axis Bank.

What Would A Kotak Mahindra-Axis Bank Combine Look Like?

The merged entity of Kotak Mahindra Bank and Axis Bank would have a combined net interest income of Rs 25,739.1 crore, based on third quarter numbers for FY17, according to the report. This would boost Kotak Mahindra Bank’s interest revenue by 69.6 percent.

Gross non-performing assets, one of the biggest worrying factors for Indian financial institutions, will stand at 5 percent for the merged entity, according to BofA ML. The gross non-performing assets ratio for Axis Bank stood at 5.2 percent while it was 2.4 percent for Kotak Mahindra Bank, as of December-ended quarter of the current financial year.

The merged entity will also hold a tier-1 capital adequacy ratio of 14 percent, well above the minimum 11.5 percent required by fiscal 2019, mandated by the Basel III norms.