Over the last few months, there has been a lot of news flow around potential merger and acquisition (M&A) in the banking sector involving Kotak Mahindra Bank and Yes Bank. According to Investec Securities, this deal would be value accretive for Kotak Mahindra Bank's minority shareholders even in the bear case.

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However, the key to success would be Kotak’s ability to leverage Yes bank’s branch network to reduce Cost of Deposits (CoD) by about 100 basis points to bring it in line with Kotak’s current CoD, the report said.

Investec has analysed the entire situation and presented probable solutions available for Kotak Mahindra Bank.

Present condition of both the lenders

As per media reports, the Bombay High Court recently deferred its hearing in the Kotak Mahindra Bank versus Reserve Bank of India (RBI) case till March 6, 2020. In December 2018, Kotak bank had challenged the RBI rule that requires promoter stake to be brought down below 20 percent.

On the other hand, Yes bank has been relentlessly struggling to raise the necessary equity to see it through the current asset quality issues.

How to deal with the situation

According to Investec, a potential corporate restructuring leading to segregation of lending and non-lending businesses and potential acquisition of Yes Bank are the best-suited options for Kotak Mahindra Bank.

Corporate restructuring

Kotak Mahindra Bank currently operates in the “bank subsidiary model”. In this structure, the bank owns stakes in subsidiaries that operate in non-deposit taking financial services such as shadow banks, insurance, capital markets and asset management.

While all these subsidiaries will be regulated by different regulators on a solo basis, as the parent is a bank, the overall supervisory responsibility for the entire group including that for the subsidiaries of the intermediate holding company will rest with the RBI.

Through this structure, the promoter shareholding in the bank could either be brought down by structuring the holding company shareholding as per RBI norms or by stake sale only in the banking subsidiary.

An alternate option would be to create a financial conglomerate structure with an intermediate holding company which holds all the other non-lending businesses for Kotak.

Listing both the bank and the intermediate holding company would enable value unlocking of the various subsidiaries - capital markets, insurance and asset management - which should be a positive event even assuming some holding company discount for the current listed company, Investec said.

Exploring the inorganic route

Another interesting strategy would be to explore the inorganic route to meet the regulatory requirements. However, Investec said it makes fundamental sense for such an acquisition at this juncture for Kotak bank.

The key is the ability to improve productivity on liabilities. While the initial cost of acquisition would centre on the potential credit losses and the size of the stress book of Yes bank, the eventual gains from the acquisition would be derived from the liabilities front.

First Published:Jan 13, 2020 2:02 PM IST