Credit ratings agencies have given the thumbs up to Kotak Mahindra Bank’s purchase of competitor ING Vysya Bank in a share swap deal announced last week.
Scores on capitalisation, costIndia Ratings and Research (Ind-Ra), the Indian subsidiary of global ratings agency Fitch, has confirmed its ‘AAA’ rating for the new entity, while Standard and Poor’s has blessed it with a BBB- rating over the long-term.
The Ind-Ra report expects “the combined bank’s capitalisation, credit profile and profitability to remain akin to other AAA-rated private sector banks”, while S&P believes it will benefit on the cost and revenue fronts, but might see a “slight deterioration in capitalisation following the deal”.
According to India Ratings’ calculations, the new bank’s post-merger pre-provisioning operating profit on average assets will drop to 2.7 per cent from 3.1 per cent for Kotak Mahindra in FY14. S&P agrees, saying the return on assets is likely to fall because Kotak offers a higher interest rate on savings deposit than ING Vysya does.
Post-merger, Kotak Mahindra’s pre-provisioning operating profit to credit cost buffer will be at 16 times, far superior to its peers whose comparable figure is 11-12 times. Ind-Ra says unless the risk-weighted asset growth accelerates significantly, it can comfortably meet Basel III requirements on capital adequacy without having to raise any additional capital in the medium term.
Expanding presenceThe merger will help Kotak spread its geographical reach and add 573 more branches and expand its current account base, two factors where it currently trails its peers. The new entity will also bring in an all-new customer base for Kotak in offering fee-based investment banking and advisory services to ING Vysya’s parent, ING NV’s clients, according to Ind-Ra.
“We expect the merged entity’s risk position to remain adequate for the next 12-24 months. The key risks to asset quality will continue to be from Kotak Mahindra Bank’s commercial real estate business. The stable outlook reflects our expectation that Kotak Mahindra will maintain its financial profile over the next 12-24 months, despite some deterioration in its capitalisation,” S&P said.
Ind-Ra expects the merger to be closed by March 2015.