The Reserve Bank of India’s (RBI) guidelines will be the key determinant of bank consolidation and continue to be a valuation driver for the ?old? private sector banks, according to a UK-based investment banking group.
The value for the marginalised ?old? private sector banks is typically ascribed to their relatively under-utilised branch network, which clearly show that in spite of weak return on equities (ROEs), Dhanlaxmi Bank (with a market capitalisation of $251million) and Development Credit Bank (with $199 million) are trading at premium price to book value (P/Bs) probably because of their weak deposit taking franchise.
?It would appear, therefore, that the stock market has already taken a position that these banks are likely to be acquired. If we were to take a call on which of the smaller banks are worth betting on purely as a potential acquisition target (rather than on the basis of proven underlying performance), then we would point towards ING Vysya, Karur Vysya and Karnakata Bank,? said the investment bank in its report.
From an acquirer?s perspective, the most attractive targets are banks with large branch networks but weak deposit efficiency (i.e., acquirers want to buy banks who aren?t being able to use their branches effectively).
From a branch network perspective, the largest old private sector banks in descending order are Federal Bank, South Indian Bank (SIB), J&K Bank, ING Vysya Bank, Karnataka Bank and Karur Vysya.
Of these lenders, Federal Bank is probably too big to be acquired. SIB is arguably too difficult to acquire (similar shareholder-related issues as Catholic Syrian Bank) and its branches are concentrated in the over-banked state of Kerala. J&K Bank is state-owned and hence won?t be sold.
That, therefore, leaves ING Vysya with a market capitalisation of $906 million, Karur Vysya with $709 million and Karnataka Bank with a market capitalisation of $509 million.
Karnataka Bank’s financial performance over the last couple of years has done little to inspire confidence as ROE has plunged to 11%, thanks to inexorably rising non performing assets and falling net interest margins (NIMs).
However, that weakness itself implies a vulnerability to predators, which, combined with the sizeable branch network, makes this an almost ideal takeover candidate.
Among the probable M&A candidates, Federal Bank with market capitalisation of $1,323 million, a 25% discount to the old private banks average, is found most attractive, said the report.
The bank has long term value in this franchise as its growth focus shifts increasingly to its neighboring southern states (?cluster? based lending and liability focus) and there is an improvement in its retail product profile (wealth management services targeted at its niche NRI client base) in Kerala.