We believe the integration will play out smoothly with the bank well positioned to deliver RoA improvement not just for FY17E but also into FY18E even in a backdrop of weak credit offtake at the macro level. Despite the lower RoEs of Kotak we believe it should trade at a premium to HDFC Bank and its historical average given (a) improving RoA trajectory, (b) higher earnings growth & (c) smaller size. Top pick in Banking.

  • Integration to play out smoothly: We believe that the integration process is likely to play out smoothly given the extreme care taken in planning the integration centrally and the high level of transparency for all the stakeholders involved which has ensured little disruptions at the branch level. Our channel checks indicate no major problems from the eIVBL unionized employees and as both these platforms fully integrate by April 2016, we expect productivity of the eIVBL branches to improve by higher cross-sell of the broader product suit.

  • Profitability remains at the core: This statement could seem like a contradiction given the lower RoE of the bank but our interactions with intermediaries clearly point out that Kotak remains very much focussed on the profitability of the deal at the transaction level and is willing to forego growth in order to protect profitability. This is particularly relevant in certain product categories such as CV/CE where intermediary driven business is not necessarily profitable for banks.

  • Growth uncertain but RoA improvement certain: Given the focus on profitability, growth could take a back seat in the near term as credit off-take still remains weak at the ground level. However, this does not worry us too much at this stage as the bank is coming off a low base in FY16E and has enough levers to pull such as lower credit costs and operating leverage to deliver RoA improvement not just for FY17E but into FY18E as well.

  • Top pick in Banking – Why Kotak over HDFC Bank?: Kotak remains our Top pick and we recommend it as a core part of the banking portfolio as the bank is well positioned to deliver consistent RoA improvement starting FY18E after normalizing in FY17E. Reiterate BUY with TP of Rs833.

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