Kotak-ING Vysya merger: Old pvt banks get thumbs up

Many were up between 3-6%, even as an index tracking banking sector hit an all-time high

The announcement of a merger between Kotak Mahindra Bank and ING Vysya Bank helped boost banking stocks on Friday, especially old private sector ones. With many of these rising three-six per cent, the index tracking the banking sector hit an all-time high.

On Friday, the S&P BSE Bankex’s performance was the best among the exchange’s 12 sectoral indices, rising 2.37 per cent to an all-time high of 20,777.42. Old private sector banks outperformed, with the nine listed lenders in this segment recording average gains of 2.57 per cent. “A lot of these banks are trading at fairly cheap valuations and the deal has acted as a trigger for re-rating. There is scope for more upside,” said Nischal Maheshwari, head of research at Edelweiss Securities.

“The market is looking at smaller banks as potential acquisition targets, which is reflected in the run-up today,” said Sri Karthik Velamakanni, banking analyst, Espirito Santo Securities India.

South Indian Bank rose 5.48 per cent to close at Rs 27.9, while Karnataka Bank closed at Rs 143.05, up 5.07 per cent. Federal Bank closed at Rs 147.5 (up 3.95 per cent), City Union Bank Rs 93.65 (up 3.31 per cent) and Dhanlaxmi Bank Rs 44.3o (up 2.31 per cent). Kotak Mahindra Bank closed at Rs 1,199.65, up 3.68 per cent. During the day, it hit a 52-week high of Rs 1,260.90. ING Vysya closed at Rs 816.8, up 0.32 per cent, hitting an intra-day high of Rs 849.

A Prabhudas Lilladher event update report authored by Nitin Kumar and Pritesh Bumb said synergies and prices made the Kotak Mahindra-ING Vysya deal attractive.

While Kotak Mahindra Bank’s experience in handling stressed accounts would help deal with any asset quality issues at ING Vysya Bank, an improvement in the economy would be a key tailwind to reducing risks from stressed accounts, it added.

However, not everyone believes Friday’s run-up, amid hope of more mergers and acquisitions (M&As), is sustainable. Deepak Jasani, head of retail research at HDFC Securities, said the run-up in valuations made old private sector banks less attractive as takeover targets, as these were beset with issues.

“Old private sector banks have issues around the dominant promoter, technology, labour and regional concentration. An acquirer would only buy such companies at beaten-down valuations. It isn’t too easy to imagine such deals happening very quickly in the face of these impediments. Of course, if the overall banking sector valuations rise, these stocks could rise to catch up (but not on hope of M&As),” he said.

“M&As will need at least a couple of other factors to come into play — an identifiable promoter and non-unionised employees,” said Velamakanni of Espirito Santo. “The run-up we have seen today could continue for another day before profit-booking sets in,” added Jasani.