Kotak Mahindra Bank’s pursuit of top-3 spot poses M&A Risks: Bernstein
ECONOMY & POLICY

Kotak Mahindra Bank’s pursuit of top-3 spot poses M&A Risks: Bernstein

Kotak Mahindra Bank's ambition to become India’s third-largest private sector lender by 2030 could expose it to significant merger and acquisition (M&A) risks due to integration challenges and weaker returns from smaller banks, according to Bernstein Research, part of Société Générale.

The brokerage noted that achieving this goal would likely require inorganic growth, given the difficulty of achieving the necessary profit growth through organic means alone. To surpass Axis Bank and secure the third spot, Kotak Mahindra Bank would need to grow profits at a rate 7% higher than Axis—a target Bernstein finds difficult to achieve without acquisitions.

Kotak Mahindra CEO Ashok Vaswani recently reiterated the bank's 2030 goal in an interview with the source, highlighting the focus on profit growth. However, Pranav Gundlapalle, head of India financials at Bernstein, warned that previous performance gaps between Kotak and Axis were driven by higher return on assets (RoA) rather than profit outperformance.

While inorganic growth options exist, they are limited. Gundlapalle highlighted IDBI Bank as a potential acquisition target, but noted that acquiring smaller banks might not immediately bridge the profit gap. “Pursuing the top-3 ambition aggressively may not guarantee a re-rating, as potential M&A risks could outweigh growth benefits,” he cautioned.

In FY24, Kotak Mahindra Bank’s consolidated profit stood at Rs 182 billion—30% lower than Axis Bank. Excluding credit costs, the profit gap widens to 35%. If Axis Bank maintains a 13% annual profit growth rate over the next six years, Kotak would need to grow profits at 20% annually to catch up by 2030.

Bernstein suggested that a merger with mid-level players like IndusInd Bank or IDBI Bank, or a combination of smaller banks like Federal Bank, Yes Bank, and IDFC First, could help Kotak close the gap. However, non-bank acquisitions are limited, and regulatory costs such as priority sector lending and cash reserve ratio requirements could weigh on profitability for any merged entity.

(ET)

Kotak Mahindra Bank's ambition to become India’s third-largest private sector lender by 2030 could expose it to significant merger and acquisition (M&A) risks due to integration challenges and weaker returns from smaller banks, according to Bernstein Research, part of Société Générale. The brokerage noted that achieving this goal would likely require inorganic growth, given the difficulty of achieving the necessary profit growth through organic means alone. To surpass Axis Bank and secure the third spot, Kotak Mahindra Bank would need to grow profits at a rate 7% higher than Axis—a target Bernstein finds difficult to achieve without acquisitions. Kotak Mahindra CEO Ashok Vaswani recently reiterated the bank's 2030 goal in an interview with the source, highlighting the focus on profit growth. However, Pranav Gundlapalle, head of India financials at Bernstein, warned that previous performance gaps between Kotak and Axis were driven by higher return on assets (RoA) rather than profit outperformance. While inorganic growth options exist, they are limited. Gundlapalle highlighted IDBI Bank as a potential acquisition target, but noted that acquiring smaller banks might not immediately bridge the profit gap. “Pursuing the top-3 ambition aggressively may not guarantee a re-rating, as potential M&A risks could outweigh growth benefits,” he cautioned. In FY24, Kotak Mahindra Bank’s consolidated profit stood at Rs 182 billion—30% lower than Axis Bank. Excluding credit costs, the profit gap widens to 35%. If Axis Bank maintains a 13% annual profit growth rate over the next six years, Kotak would need to grow profits at 20% annually to catch up by 2030. Bernstein suggested that a merger with mid-level players like IndusInd Bank or IDBI Bank, or a combination of smaller banks like Federal Bank, Yes Bank, and IDFC First, could help Kotak close the gap. However, non-bank acquisitions are limited, and regulatory costs such as priority sector lending and cash reserve ratio requirements could weigh on profitability for any merged entity. (ET)

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