Nearly 27 months ago billionaire Uday Kotak announced the takeover of ING Vysya BankBSE -0.32 % after years of eyeing it. At that time, many competitors were envious that he got the asset for a song. While the merger, which has propelled the bank to fourth rank, is nearing completion, insiders believe that it wasn’t as inexpensive as people believed it to be.
For a seasoned rainmaker like the 56-year-old Kotak who has supposedly set his sights on the next target – Axis BankBSE 2.18 % – there have been many surprises on the way, and lessons, too.
Since November 2014, the stock market has marked down the price it is willing to pay to own the lender. The bank’s shares now trade at 3.9 times its book value after falling to nearly 3 against more than 5 times prior to the merger, though it still stands out in a crowded market.
“The first learning is that you have to do our homework well. We did miss out on some parts of the homework,” says Dipak Gupta, joint managing director, Kotak Mahindra Bank. “We took a huge pension hit of Rs 300 crore in the first quarter. We didn’t do our homework well there.”
To ensure that there were no skeletons in the cupboard, ING Vysya’s stressed assets were transferred to a separate “bad bank”. These problem loans were about 6% of the erstwhile ING Vysya’s total loans which were valued at Rs 2,575 crore. After having dealt with stressed assets at one go, the senior management felt that technology was a bigger challenge than anything else.
“For us, we did the unpeeling of the onions and I can tell you we went through very difficult challenges between May and September (2016) because a lot of customer-related issues and challenges came up post-technology integration,” says Uday Kotak, executive vice chairman, Kotak Mahindra BankBSE 0.39 %.
“The merger process, according to me, was like servicing and upgrading an aircraft while it is flying,” says Shenoi. “So, we had to ensure that business, as usual, should go on, not on one side but on both sides.”
Yet another challenge was that of the people from the 85-year-old bank which was once a community bank and had unionised labour.
“In a merger, you need to place your bets on people pretty early on, but we said we will not decide. We took the easy way out and that was a wrong decision. You must kill the uncertainty even if you have to take the pain very early on,” says Gupta.
Before the merger, Kotak had a strong workforce of about 30,000 employees. Following the merger, the combined workforce stood at over 40,000. Today, this number stands at more than 46,500.
And for the man who runs the numbers Yet another challenge was that of the people from the 85-year-old bank which was once a community bank and had unionised labour.
And for the man who runs the numbers show at the bank, his calculations now stand vindicated.
“Before the merger, we did an estimate of what we were buying into. About 21 months later, the bottom line is the same. So, in hindsight, I don’t think anyone will say we got it cheap,” says Jaimin Bhatt, CFO of the bank.
“The model of superior risk pricing and lean operating model is a winning strategy, KMB is the best risk manager in town,” says Gautam Chuggani, analyst at Alliance Bernstein. “KMB’s business model of ‘superior risk-based pricing and lean operating model’ is a winning strategy in an environment of margin pressure and rapid digital adoption by customers.”
For a bank like Kotak, which has been mostly retail and capital market-oriented, an asset-light model and huge real estate, including a 9-storeyed building in Mumbai’s BKC business district, have been a blessing.
ING Vysya has also opened up a new opportunity for Kotak in terms of lending to multinational corporations because of its Dutch connection. Even though the profitability takes a hit, those customers are sticky.
“We also learnt quite a lot from their processes. For instance, their credit approval process was linked to the ratings of the borrower, they also had a very healthy MNC book. We are also taking learnings from their SME book as we go forward,” says CFO Bhatt.
While it may take a few more quarters for the full merger benefits to accrue, the top management at Kotak is leaving no stone unturned to ensure that the merger remains a happy one.
“At least once a quarter, we go through the process of assessing whether it was the right decision, whether we have got the benefits of the plans we made or whether we think we will get the benefits in the future or not. So reassessment from a discipline point, we rigorously have once a quarter,” says Gupta.
The road to merge with ING Vysya has been bumpy for Kotak. But does that mean that the next one will be pushed behind or not be there on the horizon at all? There have been speculation about a marriage with Axis Bank. How would Kotak approach the next one?
“We were looking at ING Vysya for many years, and about a year before that we came to this view that as a value proposition at that stage, which was about a year before we actually merged, it did not make sense for our shareholders. But that does not mean that we didn’t like the asset at right value,” says Kotak. “That is how we think about any opportunity and obviously it goes without saying that if there is something which makes sense for us, we will always keep an open mind.”
