Days after RBI rejected Kotak Mahindra Bank's plan of taking the preference share allotment route to reduce promoter Uday Kotak's shareholding, Asia's richest banker may be eyeing a big acquisition to pare his stake to meet RBI's promoter holding requirement.
According to a report in Bloomberg, if the bank issues about $17 billion of new stock to back an acquisition, that would effectively dilute the billionaire's holding below the 20 per cent target. "Uday Kotak may favor a big acquisition that will take care of his dilution woes in one go," Rakesh Kumar, an analyst with Elara Securities India told the news agency.
Quoting analysts, the report added that acquisition targets could include India's third-largest private lender Axis Bank or a financial firm such as PNB Housing Finance Ltd.
As part of the RBI's guidelines for new bank licences, the Kotak Bank promoters were asked to reduce their stake to below 20 per cent by December 2018 and to 15 per cent by March 2020. The aim of the guidelines was to diversify shareholding to reduce promoter control in an entity. Kotak currently owns about 567 million of the bank's 1.9 billion shares. In percentage terms, it is close to 30 per cent.
However, the bank had earlier said that promoters only have 15 per cent voting rights under the RBI Regulations Act, which in itself is a reduction of control in an entity.
Odds of Kotak Bank's merger with Axis Bank
Uday Kotak had earlier said that he was "open to looking at inorganic growth as long as it is sensible". On April 12, the Japanese brokerage firm Nomura in its report had said it was the perfect time for Kotak Bank to bid for Axis Bank. "With a very short time left in the CEO's term at Axis Bank, RBI's pressure on Axis Bank's management and with an asset quality clean-up exercise continuing, we believe this is the best opportunity for Kotak Bank to acquire or merge with Axis Bank," Nomura said in its report.
But does such a merger make sense for the Axis Bank, the Reserve Bank of India, the banking regulator and the government, which is facing a totally different challenge to turnaround the public sector banks (PSBs)?
Axis Bank is actually amongst the top five large banks in India in terms of overall performance. In a recent Business Today - KPMG Best Banks Study 2016-17, Axis Bank scored high on many of the key parameters. Take for example, the private bank was at number 2 position in terms of the 3 year CAGR of growth in loans and advances. Similarly, the bank's position was at number 3 in terms of growth in deposits. The net NPAs were at 2.31 per cent, better than ICICI Bank and SBI. The cost to income ratio was at 0.41, which is very low. The bank was ranked at number 3 amongst the large banks. Similarly, return on assets (ROA) at 0.64 per cent is way ahead of Bank of Baroda and SBI. The capital adequacy ratio at 14.95 per cent is quite comfortable and amongst the top two large banks. So where is the urgency or the case to merger the bank with another private bank.
For Kotak too, the merger is not all about size. In a fast changing digital world, banking is more about software robotics, AI, machine learning etc. The entire systems and processes are getting digitized to give customer a seamless journey. Banks today are not talking in terms of branches, ATMs, geography and people.