Merger of Axis Bank is not the way forward for banking industry

"Perfect time for Kotak Bank to bid for Axis Bank," says the Japanese brokerage firm Nomura in its report post the sudden exit announcement of Shikha Sharma this week. But does such a merger make sense for the Axis Bank, the Reserve Bank of India, the banking regulator and the government, which is facing a totally different challenge to turnaround the public sector banks (PSBs).

The Axis Bank board is well aware of the strengths of the bank. Axis Bank is actually amongst the top five large banks in India in terms of overall performance. In a recent Business Today - KPMG Best Banks Study 2016-17, Axis Bank scored high on many of the key parameters. Take for example, the private bank was at number 2 position in terms of the 3 year CAGR of growth in loans and advances. Similarly, the bank's position was at number 3 in terms of growth in deposits. The net NPAs were at 2.31 per cent, better than ICICI Bank and SBI. The cost to income ratio was at 0.41, which is very low. The bank was ranked at number 3 amongst the large banks. Similarly, return on assets (ROA) at 0.64 per cent is way ahead of Bank of Baroda and SBI. The capital adequacy ratio at 14.95 per cent is quite comfortable and amongst the top two large banks. So where is the urgency or the case to merger the bank with another private bank. " It's like suggesting a surgery for a minor illness. There was an issue with the leader ( not of board but of regulator ) and the leader is gone. A new leader would take the bank forward," says a banker. In fact, the bank has a very good retail and digital platform to grow in future.

It also doesn't make sense for government to push for a merger in the private banking space. The private banks actually controls around 15 per cent of the deposits as well as advances of the sector. The entire private pack is known for better performance, better banking services, digitization, meritocracy and they are probably lagging in governance. But the entire PSB space has nothing to show except the SBI. They all are neck deep in trouble with distressed assets, lagging behind in digitization, a highly de-motivated workforce, absence of visionary leaders etc. The government has bigger problem at hand because of lower capital levels at the PSBs than to effect a merger amongst the private bank. Axis Bank any day is a much better bank than any PSB. And if at all government wants to encourage consolidation, they should suggest Kotak Bank to buy one of the PSBs. There are already close to a dozen banks that are under RBI's intensive care i.e. under the RBI's prompt correct action (PCA) where they have restricted lending because of higher NPAs, falling profitability, capital and net worth. "The regulator should encourage M&As in the PSB space in consultation with the government," say experts.

Even for Koatk's perspective, the merger is not all about size. In a fast changing digital world, banking is more about software robotics, AI, machine learning etc. The entire systems and processes are getting digitized to give customer a seamless journey. Banks today are not talking in terms of branches, ATMs, geography and people. There are already talks of Google or facebook distributing financial services products in future with banks at the bank end. There are also aggregators of loans like bankbazaar, which are already selling cards and personal loans of hundreds of banks and financial institutions. WhatsAPP is also emerging as a payments interface for banks in future.

In fact, Kotak Bank has already did a big merger with South based ING Vysya which was almost equal to its balance sheet size. They have got a very good portfolio of SME, Agri and MNC clients and also new geography South of India from the merger. Many say Kotak has a large platform to extract the most of it as it has a bouquet of products like loans, insurance, mutual fund etc.