The Kerala-headquartered bank, however, in an exchange filing, said the reports were speculative and that there was no information available with the company that needs to be reported as per the extant guidelines of the Securities and Exchange Board of India (Sebi).
Even so, if the merger was to go through, analysts at Emkay Global Financial Services, highlight a slew of challenges that it may face.
According to the domestic brokerage house, the deal could be mutually beneficial for both banks, given the potential synergy benefits. "For Federal, the merger could offer access to a larger banking/product platform, capital and productivity gains," said the Emkay report dated 6 September. Also, technology integration will be less of a challenge, given that both banks are possibly operating on similar CBS platforms, while being technically agile.
But the Federal Bank’s employee union's resistance and Kotak Mahindra Bank's inhibition post the ING Vysya acquisition amid potential change of guard dampen the likelihood of the deal coming through, cautioned the brokerage house. As nearly 80% of Federal Bank’s employees are part of unions (versus 35% for ING Vysya Bank), employee unions may look to scuttle any such acquisition, highlighted the Emkay report.
"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," said report.
"Notwithstanding the speculative deal, we believe the fundamentally-strong Federal Bank, with a stable management, healthy liability profile, an improving return profile and a digital edge over small-to-mid size private banks, calls for better valuations," added the report.
It should be noted that Emkay has a buy rating on both these banking stocks. The broking house feels that accelerating credit growth and the recent softening of G-Sec yields could be additional near-term catalysts for both banks.
