Once is happenstance. Twice is coincidence. Three times is enemy action. The anti-hero Goldfinger’s retort in Ian Fleming’s popular series on a British spy is a fitting description of the recent spate of mergers and acquisitions in India’s banking industry.
What is arguably a route to build a stronger enterprise and reward shareholders is emerging as a tool of desperation and even force. It is no longer restricted to public sector banks. Even as the government is forcing able banks like Bank of Baroda to rescue weaklings like Dena Bank through mergers, private sector lenders are looking for marriages that would help them meet regulatory norms.
“Since 2015, marriages in the financial sector have the look of being forced either by the government in the case of PSU banks or by regulatory circumstances as is the case in private sector,” says Ashwin Parekh, an independent banking expert. “In the past, such deals were motivated by commercial considerations.” Parekh was involved as an adviser in many mergers during his stint at EY.
In all this, shareholders’ interests are being overlooked.
Exhibit A is microlender-turned-universal bank Bandhan Bank Ltd. The match between the lender and affordable housing financier Gruh Finance Ltd was made out of desperation. The bank paid a stiff price for it and also got punished by shareholders for choosing the arduous route of merger to fulfil a regulatory rule which it didn’t even end up being successful in meeting. Bandhan Bank’s promoters still have to bring down their stake from 61% to 40% before the regulator lets go of the leash it put on branch expansion.
The third recent bank merger involving IDFC Bank Ltd and Capital First Ltd, however, was driven by commercial consideration. Shares of the two firms have rallied as a result.
Another promoter, Uday Kotak, is still struggling with his stake dilution. Kotak Mahindra Bank Ltd has missed the deadline to meet the shareholding norm after a decade-long rope from the Reserve Bank of India (RBI) reached its end in December. Kotak took to suing the regulator after the bank’s issue of perpetual non-cumulative preference shares was shot down as a valid method of stake dilution. Perhaps the merger route proved too onerous for Kotak, having gone through that experience already just five years ago with ING Vysya Bank.
It took more than eight quarters for Kotak Mahindra Bank to align ING Vysya’s balance sheet, processes and people to that of itself. The struggle was sweet because the merger was willingly entered into. Nevertheless, the initial quarters were marked by a slowdown in lending and an increase in bad loan ratios.
But unlike that deal, the next one would be driven by the compulsion to meet the promoter stake threshold. That is if the court throws out the bank’s petition against RBI on 17 January when it hears the case. There aren’t many easy pickings for Kotak in the market for a merger without pain.
Hence, a question begs to be asked. Will investors of banks have to contend with a forced merger risk in addition to other business risks? Beyond the Kotak and Bandhan cases, there doesn’t seem to be any immediate such risk for other private sector banks, although government banks will almost always face this risk. Small finance banks could also face this risk, although the deadline for meeting shareholding norms in their case is quite some time away.
The bigger worry is that the central bank’s policies on shareholding have caused such damage, who knows what lies in store in the future.
To be sure, what started out of despair can be rewarding in the long run. Analysts believe the Bandhan Bank-Gruh Finance merger has long-term benefits. “Of course it does not negate the fact that they paid a high price for it,” said Gautam Chhugani, director of India financials at Bernstein. In Chhugani’s view, Indian banks need scale and a merger is the best way to get it.
It’s difficult to argue with that, except when a deal is forced.