21 November 2014
Update | Sector: Financials
Kotak Mahindra Bank
BSE Sensex
28,068
S&P CNX
8,402
CMP: INR1,157
TP: INR1,149
Neutral
Taking a big leap
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
KMB IN
771.4
1,164/631
16/15/-8
892.5
14.4
Opportunities galore; Integration is a key
The boards of Kotak Mahindra Bank (KMB) and ING Vysya Bank (VYSB) have approved
merger with swap ratio of 0.725:1 (KMB: VYSB). We believe these two banks
complement each other well in terms of branch presence, product offerings and
places KMB as a serious competition for the large private banks. Post merger, we
expect FY16E cons BV to increase by INR40 (up ~12%). RoE of the merged entity would
decline by ~100bp; however, after factoring in post-merger synergies, decline in RoE
would not be significant.
Financial Snapshot (INR Billion)
Y/E Mar
2015E 2016E 2017E
NII
62.3 73.8 89.2
OP
42.3 50.8 62.8
NP
25.1 30.1 37.5
NP#
36.9 44.7 54.9
NIM (%)
4.2
4.1
4.0
EPS# (INR)
40.6 49.2 60.4
EPS Gr. (%)#
NA 21.2 22.8
BV. (INR)#
324.5 370.6 427.3
RoE - Std (%) 12.3 13.2 14.4
RoA - Std (%) 1.6
1.6
1.6
RoE - (%)#
13.3 14.2 15.1
Valuations
P/E. (X)#
28.5 23.5 19.2
P/ BV (X)#
3.6
3.1
2.7
# Consolidated post VYSB merger /
* Earnings for banking entity
unless stated
Shareholding pattern (%)
Jun-14 Sep-14 Nov-14#
Promoter
DII
FII
40.3
1.8
35.3
40.1
2.0
34.7
34.0
19.1
33.6
Deal values VYSB at 2.0x trailing BV:
The deal values VYSB at ~INR150b
(INR790/share, +16% over 30D avg. share price) and will lead to ~18% equity
dilution for KMB. Merged entity will be the fourth largest private sector bank
with a loan book of INR1.2t and market share of 1.8% of loans. VYSB is valued at
0.2x deposits and INR268m/branch, one of the highest in private bank mergers.
Significant strategic benefits for KMB:
a) KMB, which has strong presence in
North and West regions (80% of KMB branches), will get deep inroads into the
southern region (64% of VYSB branches). b) KMB can utilize strong expertise of
VYSB in business banking (36% of loans, 9% for KMB) and LAP segment and also
get access to healthy CA float of VYSB, helped by cash mgmt and SME business
and c) continued access to ING global clients (ING will remain a large
shareholder (6.5%) in the bank and will have a board seat) and ING expertise in
digital banking role out and d) VYSB branch network can be better utilized for
consumer and auto loans penetration where KMB has strong expertise.
Pro-forma ROAs to moderate; significant scope for improvement:
KMB (std)
makes healthy ROA of ~1.9% whereas, VYSB makes ~1.1%. On a pro-forma
merged basis ROA would come down to ~1.6% however, merger synergies (low
hanging fruits for generating retail business from VYSB franchise) can be
significant in terms of improvement. KMB has INR1.85b and INR24.8m business
and profits per branch whereas, for VYSB it is INR1.38b and INR11.8m resp.
Key risks:
(a) Integration of workforce of VYSB with KMB especially old
employees linked to IBA payroll (~3K) (b) Overlapping of branches in some of
the key centers (c) Improving the VYSB branch productivity levels
Value-accretive deal:
Merger will be BV accretive by ~INR55 (32%) and ~INR42
(15%) for KMB at standalone and consolidated level. Merger places KMB in a
sweet spot for the next growth cycle with strong presence across geographies,
expertise in key product lines and continued healthy capitalization (CAR of
16.5%). KMB premium multiples are likely to sustain considering strong growth
in the coming years. While we are positive on the business, valuations at
3.1x/2.7x Cons BV (pro-forma merged nos.) of INR371/INR427 and 24x/19x
consolidate PE limit upside. As swap ratio is in place, VYSB is expected to track
KMB price performance. Our revised KMB SOTP target price comes to INR1,149.
(3.1x FY16 Cons. BV and 24x Consolidated earnings). Maintain
Neutral.
Others
22.6
23.2
13.3
# Post-merger with VYSB
*FII includes depository receipts
Stock Performance (1-year)
Kotak Mahindra Bank
Sensex - Rebased
1,300
1,100
900
700
500
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com); +91 22 3982 5415
Vallabh Kulkarni
(Vallabh.Kulkarni@MotilalOswal.com); +91 22 3982 5430
Investors are advised to refer through disclosures made at the end of the Research Report.