An agreement with IndusInd Bank will test two prized values ​​of Uday Kotak

Your bank’s performance metrics have reflected this approach over the years. Kotak Mahindra Bank has one of the lowest bad loan rates in the banking industry. Be it the financial crisis of 2008 or even the asset quality cleanup pushed by the regulator four years ago, the private sector lender has managed to maintain impeccable asset quality. Its investors expect the same behavior to be repeated in the current times of pandemic.

In light of this high value for quality and relatively low tolerance for risk, a merger with IndusInd Bank, which has a comparatively more stressed portfolio of assets, seems uncharacteristic. Kotak’s other prized treasure is his equity stake in the bank, which is why the bank was even willing to take the Reserve Bank of India to court. A merger with IndusInd will dilute Kotak’s existing shareholders, although of course it can still be considered at the right price.

Late on sunday, mint reported that the promoters of both banks are in initial talks for a full merger agreement. This was quickly reported by IndusInd Bank, while Kotak Mahindra Bank has declined to comment. Whether a deal is in the works or not, Kotak needs strong motivation to swallow a bank whose loan book leans toward auto loans. This is a segment that has been in trouble for a year and the pandemic has hit car companies even more. IndusInd Bank also had up to 16% of its loan portfolio in default as of June, compared to 9% for Kotak Mahindra Bank.

That said, both lenders have announced that they will not apply after asset growth amid a pandemic, preferring to retain asset quality. To that extent, IndusInd Bank may be on the same page as Kotak Mahindra Bank in managing risk in current times.

The second aspect of equity dilution must be weighed against the growth opportunity that a deal with IndusInd provides. According to analysts at Macquarie Research, Kotak’s loan portfolio and branch network may increase by 94% and 100%, respectively, if the deal goes through. Meanwhile, at current prices, the dilution in share capital can be only about 17%. But Kotak has recently learned from the ING Vysya deal that integrating a merger is not a straightforward process.

Note that RBI has allowed Kotak to have 26% in the bank, but if its stake falls, the regulator will not allow Kotak to increase its stake again. A merger with IndusInd Bank will reduce the stake to below 26%. Analysts said Kotak’s determined fight with the RBI for equity stake shows that he values ​​his stake. “Why would I take him down after fighting so much? If you want, the reason should be very strong, like exponential growth or higher returns on business, “said an analyst who requested anonymity.

While the opportunity for exponential growth may be tempting, how it fits with Kotak’s well-known conservatism remains to be seen.