Kotak Mahindra Bank Ltd., which this year completed India’s largest banking acquisition, is foreseeing more takeovers among domestic lenders struggling to revive profits as they battle bad loans.
Weaker state-run banks should be allowed to merge with stronger counterparts to energize a segment that has almost twice the level of stressed assets than the national rate, according to C Jayaram, joint managing director of Mumbai-based Kotak Mahindra. As the largest shareholder, the government needs to approve any proposal to merge lenders it controls.
India has one of the most fragmented banking industries, with 47 domestic lenders owning national networks that compete for $1.3 trillion of deposits. A stronger banking industry would improve access to credit -- an element missing from Prime Minister Narendra Modi’s efforts to boost the economy.
“There’s a lot of scope for consolidation in India’s banking system,” Jayaram said in an interview in Mumbai last month. “There is no good reason for having so many banks on a stand-alone basis in the country, whether it be state-run banks or old private-sector banks.”
Kotak Mahindra completed in April its 150-billion-rupee ($2.4 billion) takeover of ING Vysya Bank Ltd., a transaction that created India’s fourth-largest private-sector bank by assets with more than 1,200 branches.
Return on Equity
The Vysya acquisition gave the bank founded by billionaire Uday Kotak a presence in the country’s south as well as in small and medium-sized business banking. Kotak Mahindra had a return on equity that was four percentage points higher than Vysya’s before the deal was announced.
Return on equity in the Indian banking system fell to 9.4 percent in the year ended March, the lowest since at least 2007, central bank data show.
Modi’s cabinet will soon consider a proposal to combine Bharatiya Mahila Bank, a government lender that focuses on female borrowers, with State Bank of India, people briefed on the matter said June 30. Maintaining BMB as a separate entity would have required a large capital infusion by the government, the people said.
Kotak Mahindra shares rose 1.9 percent to 1,435.35 rupees in Mumbai trading Thursday. State Bank of India was little changed at 267.85 rupees and the 10-member S&P BSE Bankex Index climbed 0.1 percent.
“Consolidation in the country’s banking system should start with state-run banks,” said Hatim Broachwala, a banking analyst at Nirmal Bang Institutional Equities Ltd. in Mumbai. “That should be the priority, as many of the smaller lenders are struggling with low profitability, high bad-loan ratios and limited capital.”
Three government-controlled banks -- United Bank of India, Central Bank of India and Indian Overseas Bank -- had stressed-asset ratios of about 20 percent at the end of March, data provided by the finance ministry show.
That compares with the banking system’s 11.1 percent, the highest since 2002, and 8.4 percent for State Bank of India, the country’s biggest by assets. High levels of soured debt curtail the profitability of many banks, making them reluctant to lend.
“Public-sector banks have their own share of problems due to capital shortage and non-performing loans,” Jayaram said. “There is a case for the merger of better-managed PSBs and the not-so-well managed.”
The banker advocates the creation of a so-called bad bank to dispose of government banks’ non-performing loans, akin to the entity created by Barclays Plc Chief Executive Officer Antony Jenkins in 2014 to harbor 115 billion pounds ($180 billion) of unwanted assets.
“That is the only way in which you can let those public-sector banks free and build their businesses going forward,” Jayaram said.
Kotak Mahindra, based in Mumbai, had a stressed-asset ratio of 2.1 percent as of March, and a net interest margin of 4.9 percent, the highest among 40 publicly traded banks in India, according to an exchange filing.
Shares of the lender have surged 18-fold in the past decade, about four times the growth in the Bankex. Jayaram is projecting loan growth of about 20 percent in the year to March 31, compared with 25 percent in the previous fiscal year.