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The shares of Federal Bank Limited witnessed a sharp surge of 8.53 per cent on Monday’s early trades and clocked a fresh 52- week high of ₹ 129.75 apiece. This happened after media reports regarding the bank’s merger with Kotak Bank surfaced.

The private sector lender, Federal Bank, said that the media reports about the initial merger talks with Kotak Mahindra Bank are “speculative” in nature. Kotak Bank, on the other hand, has declined to comment on the story.

“In this regard, we would like to state that there is no information available with the Company as of today, which is required to be reported under extant SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, and which may have a bearing on the stock price of the Company,” said Federal Bank in an exchange notice, as it commented about the reports regarding the merger.

CLSA

“Fundamentally, regional banks are a strong liability franchise in their micro markets, and in Kotak Bank’s case we have highlighted it would need to increase liability mobilization with its strong growth ambitions, and hence a merger would be positive,” CLSA India said in a note.

It added that the share ownership of Federal Bank is dispersed, unlike ING Vysya Bank, However, investors should be fine with owning Kotak Bank’s shares assuming that they receive a premium in the merger.

The brokerage said that the merger could boost Kotak Bank’s EPS by 12%. However, the highly unionized labour force of Federal Bank could pose challenges for the bank. It said that the dilution in Kotak Bank’s stock price, if the merger were to go through at the current prices, would be 7 per cent and even if Kotak Bank were to pay a premium of 20-40 per cent for Federal Bank, the dilution would still be less than 10 per cent.

Emkay Global

According to analysts at Emkay Global, even if the merger were to go through, there are a slew of challenges that it might face. It said that the deal could be mutually beneficial for both the banks. Federal Bank could get access to a larger banking/product platform, capital and productivity gains. 

They added that technology integration will be less of a challenge, given that both banks are possibly operating on similar CBS platforms while being technically agile.

One of the major challenges that they might face is resistance from Federal Bank’s employee union. Further, the brokerage cautioned that Kotak Mahindra Bank’s inhibition post the ING Vysya acquisition amid a potential change of guard dampens the likelihood of the deal coming through. About 80% of Federal Bank’s employees are part of unions (versus 35% for ING Vysya Bank)

“Reportedly, ICICI Bank had made an attempt in the past, to acquire Federal Bank, but was thwarted by the employee unions with strong lineage to the ruling left party in the home state of Kerala. Even if the deal sees successful culmination, cultural integration with Federal’s employees, who are largely residents of Kerala, and higher cost-per-employee could be added irritants,” according to the report.

Analysts say that Federal Bank is trading near its 3-year high, showing strength in the company. The bank’s income grew 1.94% to ₹ 4081.48 in Q1FY23, as compared to ₹ 4003.97 crores in the corresponding quarter last year. It is a large-cap company with a market capitalization of 26122 crores. It has a dividend yield of 1.45% and its shares are trading at a PE (TTM) ratio of 11.54, as compared to the sector PE of 24.72.

Written by Simran Bafna

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