What if Kotak Mahindra Bank acquires IDBI Bank, asks Nomura

• Analysts believe that a potential acquisition will improve lending capability and expand branch footprint Kotak Mahindra Bank.
• Market unclear on such a large acquisition would play out if it leads to a merger eventually.
• The end game should be full acquisition and amalgamation of IDBI Bank.

Life Insurance Corporation of India along with the government are looking to divest 60.72% in IDBI Bank. The process has already been kicked off and this will be a test case for the government as it will give it a blueprint for future divestments. So far media reports have speculated that Kotak Mahindra Bank was in the fray, but now Nomura Global Markets Research, a Japanese investment bank, has come out with a report that projects various scenarios of the potential acquisition and also explains how Kotak Mahindra Bank stands to gain if it acquires the bank.

For starters, a possible IDBI acquisition could take KMB’s loan book to Rs 5 trillion plus along with a CASA ratio of 50%, which would be ahead of industry’s. The acquisition would also result in a sharp expansion in its branch footprint. Analysts at Nomura believe that the acquisition would enhance its lending capability as the loan to deposit ratio will fall to 78% from 85% in Q1FY24.

Analysts at Nomura have painted different scenarios of any potential transaction which will entail acquisition of a 61% stake in IDBI Bank. The first scenario could be a full cash-based transaction while the second would be stock-based and the third could be a hybrid one – entailing cash plus stock. According to the report, “While a cash-based acquisition is strongly EPS and RoE accretive, a stock-based acquisition is BVPS (book value per share) accretive (while being RoE dilutive).

In all scenarios, the end-game for KMB should be the full acquisition and amalgamation of IDBI Bank, in our view.” The Japanese investment bank is of the view that scenarios which involve cash are preferable as they would bump-up to RoEs, which are currently depressed due to KMB’s low leverage of ~6x vs 8-9x for large private banks.

But this deal may not be without its share of complications, says Nomura. The Reserve Bank of India has incrementally not been forthcoming in terms of allowing banks to pick-up stakes in other BFSI businesses, says the report. Therefore, it is unclear how such a transaction would be allowed. The central bank could make an exception Kotak Mahindra Bank is to be eventually merged with IDBI Bank. A merger also is not without its share of complication, even if it is allowed.

There is no certainty on how this can impact the share price of Kotak Mahindra Bank even if the merger leads to better financial ratios.