Odds stacked against Kotak-Axis merger

Big mergers in banking are coming. That was something the market has been waiting for with bated breath over the last few years. SBI's merger of five associate banks and also the Mahila Bank is  the only official announcement so far. The process of merger is already on. The government has already indicated consolidation in the public sector banking (PSB) space by creating three-four large  banks with substantial size.

Nobody had  thought of a merger possibility of two large banks in the private banking space.  That too,  well run Axis Bank and Kotak Mahindra Bank (it recently acquired ING Vysya Bank).

Even as the two banks have denied the merger  talks as mere speculation , the market is  refusing to believe them. The speculators  are betting on  this  big merger which will create a bank  of the size of ICICI Bank and HDFC Bank , with  total assets of over Rs 7 lakh crore.  But  the merger is not all about size.  On the face of it,  the odds are against the merger.  

1)    Size no longer matters
Banking is all set to change with digitisation, big data, artificial intelligence, robotics , digital wallets  and app banking.  Banks no longer bet on physical infrastructure ( like branches , ATMs and people ) to acquire new customers or business. The leaner you are , the better it is for you while competing in the new changing banking space. Globally , the app only banks are a reality.  In India , too , players like PayTM  are creating an altogether new model of  'digital wallet' banking.

2)    The next big thing is differentiated banks
The new payments banks and small finance banks are  going to call the shots in the banking space by focusing on transaction and payments space.  Kotak, too, has  taken a stake in  Airtel Payments Bank.  These new banks  are not planning to create a large physical infrastructure but are betting big on new technology.     

3)    ING Vysya  merger integration
Kotak Bank has recently gulped ING Vysya , which was almost equal to the size of the bank.  There are many integration challenges in such a large merger.  Kotak has got SME , Agri and MNC clients  and also a new geography , South of India, to explore.   In such a large merger , the benefit always accrue over a longer period of time. The top priority for Kotak currently is to  increase the efficiency of the new branches acquired and also improve the productivity of people.  Kotak Bank has a large suite of products including insurance , mutual fund, etc. to sell through these  newly acquired branches. This process itself would take 3-4 years to get the maximum out of  this merger.  

4)    Rough operating environment
The  entire banking industry is on the cusp of change. In fact , given the speed at  which changes  are taking place in the industry especially on the digitisation front, the banks need  management bandwidth to  react and also  keep ahead of the change.  At this juncture, the other business  challenges are taking a back seat. Axis Bank , however ,  has been facing issues on asset quality especially in its corporate book. In fact , the bank's asset quality has been deteriorating over the last few year. The bank has a very high restructured book  of close to 4 per cent of its advances.  Given the challenging environment , it would be difficult to make a recovery. The resolution mechanism  has also slowed down a bit. ARCs  with limited capital  are busy resolving the existing backlog and  tools like SDR  and S4A   have also not seen any traction  because of  valuation differences and lack of buyers.

5)    No new geography or product suite
The mergers always take place either for acquiring  product basket or  for getting a new geography. ING Vysya merger provided a huge network of branches in the South where Kotak was not present. Similarly , ING gave access to SME , Agri and MNC portfolio , where ING Vysya was strong.  In case of Axis ,  the duo have similar presence in urban , semi-urban and rural with Kotak having larger presence in metros.