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Last Updated : Feb 27, 2017 05:59 PM IST

COMMENT: Axis Bank suitor list grows, but Kotak unlikely to overpay

From the only eligible reported proposal of a Kotak Bank, the list has now widened to include other big names like ICICI Bank, HDFC Bank and HDFC. There could be some over-ambitious mid-sized players also queueing up over the next few weeks.

A Balasubramanian

Axis Bank  has turned out to be the 'sought-after bride’ in the banking space. With a diversified shareholding (largest shareholding belonging to LIC at 13.85 percent and SUUTI at 11.5 percent) the bank looks game for the marriage, at a price. The 16 percent rally in the stock price albeit the muted Q3FY17 earnings may be partially attributed to the buzz of match-making.

From the only eligible reported proposal of a Kotak Bank , the list has now widened to include other big names like ICICI Bank   , HDFC Bank   and  HDFC   . There could be some over-ambitious mid-sized players also queueing up over the next few weeks.

For the conservative strategy of HDFC Bank of 'growth with quality’, acquisition of Axis Bank with no overt complementarity of network doesn’t look like a natural choice. HDFC Bank might not find it easy to walk an uncharted path – corporate/term lending, asset quality issues etc. However, the lure of size can’t be ignored.

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With a Balance Sheet size of Rs 8.2 lakh crore, growing organically without facing the impact of macro headwinds might not be easy for HDFC Bank. The acquisition, in one stroke, translates to growth of four years (at CAGR of 15 percent). While the reported trailing price/adjusted book of Axis at 2.6X doesn’t look expensive, factoring in the poor asset quality (5/25, SDR and part of restructured book), the price/adjusted book works out to 3.1X. It is unlikely for HDFC Bank to pay a premium for Axis similar to what it enjoys itself for its pristine quality. If at all growth imperatives push HDFC Bank to take such a decisive step, it is unlikely to cough up beyond 3.5X adjusted book – implying an upside of 11 percent from the current market price. While the name of its parent HDFC is also doing the rounds, a pure mortgage lender might not receive the same attention from the decision-makers. The considerations are slightly different for ICICI Bank. ICICI, although 30 percent larger in balance sheet size compared to Axis and a conglomerate with successful businesses beyond the bank, has broadly similar liability and asset profile as Axis.

The reported level of stress in asset quality is higher for ICICI Bank at this point in time (according to our calculation the total assets that needs to be watched are about 12.9 percent of advances for ICICI Bank as against 8.7 percent for Axis);  that partially explains its valuation discount. ICICI would certainly not be comfortable with an Axis-Kotak combine that relegates it to a position of No 4 in the industry. Given the asset quality headwinds, an acquisition/integration deflects the attention of the Street from asset quality issues, thereby giving it more time to put its house in order.

However, the top management of Axis (ex-ICICI) may not relish the idea of a union, and such softer issues do play an important role. ICICI Bank quotes at 1.8X trailing reported adjusted book compared with our calculated adjusted book of 2x. We doubt if it can match offer of a competitor like Kotak that might be willing to pay much more. We have delved in detail about a probable Kotak Axis merger earlier

A savvy entity like Kotak might be enticed to catapult to No 3 position in the industry quickly while complying with the RBI stipulation pertaining to promoters’ stake with this union. However, it is likely to conduct a thorough due diligence to avoid probable asset quality surprises in the future. Inorganic expansion has never come at an inordinate price for Kotak. Minority shareholders of Axis should come to terms with this fact.Read more at: http://www.moneycontrol.com/news/business/comment-axis-bank-suitor-list-growskotak-unlikely-to-overpay_8540581.html?utm_source=ref_article

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First Published on Feb 22, 2017 05:57 pm

tags #Axis Bank

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