Will Kotak Mahindra Bank acquire IDBI Bank

Life Insurance Corporation of India, in collaboration with the government, is actively pursuing the divestment of a 60.72% stake in IDBI Bank. This process has been initiated and holds significance as it serves as a litmus test for the government’s approach to future divestitures. Initial reports from the media had hinted at Kotak Mahindra Bank’s potential interest, but now, Nomura Global Markets Research, a Japanese investment bank, has published a comprehensive analysis projecting various scenarios for the potential acquisition. Nomura’s report elucidates how Kotak Mahindra Bank could benefit from acquiring IDBI Bank.

In one plausible outcome, an acquisition of IDBI Bank could substantially augment Kotak Mahindra Bank’s loan book to exceed Rs 5 trillion, coupled with a notable CASA (Current Account Savings Account) ratio of 50%, outpacing industry norms. Furthermore, this acquisition would bring about a considerable expansion of Kotak Mahindra Bank’s branch network. According to Nomura analysts, this move would amplify lending capabilities by lowering the loan-to-deposit ratio from 85% in Q1FY24 to 78%.

Nomura’s analysts have sketched out various scenarios for the prospective transaction, each entailing the acquisition of a 61% stake in IDBI Bank. The first envisages a wholly cash-based transaction, while the second envisions a stock-based approach, and the third contemplates a hybrid arrangement involving both cash and stock. The report indicates, “Although a cash-based acquisition would notably enhance earnings per share (EPS) and return on equity (RoE), a stock-based acquisition would increase book value per share (BVPS) (albeit with a dilutive effect on RoE). In all scenarios, the ultimate objective for Kotak Mahindra Bank should be the complete acquisition and amalgamation of IDBI Bank.”

Nomura recognizes potential complexities inherent in this deal. The Reserve Bank of India (RBI) has demonstrated cautiousness in granting banks permission to acquire stakes in other BFSI (Banking, Financial Services, and Insurance) enterprises. The report highlights the uncertainty surrounding the feasibility of such a transaction. However, the central bank might make an exception if Kotak Mahindra Bank eventually merges with IDBI Bank. Nonetheless, a merger itself would entail intricate challenges, even if it receives regulatory approval. It remains uncertain how such developments could impact the share price of Kotak Mahindra Bank, even if the merger leads to improved financial ratios.

Source : Nomura