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New Banking license –> catalyst for “More” to “Few” -> M&As ? (Part -2)

Event: The Reserve Bank of India(RBI) had put up a discussion paper on issuing New BankiLicenses in August, 2010. The discussion paper was a continuation of an earlier version mentionedthe RBI’s Annual Policy Statement for the year 2010-11.The current discussion paper highlighted norms/suggestions/feedback for Industrial and business houses to enter into the banking sector amo

. ,CII made a pitch for allowing industrial houses that have experience and good track record in financservices to set up banks.

Impact: According to the norms earlier promulgated, the possibility for Industrial Houses to

allotted with Banking Licenses looked remote. However, the RBI may allow the Corporate Housesbid for Banking Licenses but with a strict shareholding which may limit their influence on decision making with respect to large size financing. Also, Industrial Houses with rural focus may

.

Consolidation is a key catalyst for the modern banking industry to leverage the benefits of large sexpand and diversify large bank loan portfolios to lessen the likelihood of failure and harness ccompetencies. In the recent time, the Indian banking sector has witnessed a lot of M&A actions. Soof the recent M&A activities in the Indian Banking Industry are: ICICI Bank’s control of a regioplayer, Bank of Rajasthan; the merger between IDBI (Industrial Development bank of India) andown subsidiary IDBI Bank, merger between Centurion Bank and Bank of Punjab, Rabobank’s part-efrom Yes Bank to make way for the Dutch Group’s solo India venture; entry of Japan’s SumitoMitsui through a 4.5% stake in Kotak Mahindra Bank. If big corporate houses are allowed to enter banking space, the banking industry would then slowly but surely move from a regime of  ‘lanumber of small banks’ to ‘small number of large banks’. The new era is going to be oneconsolidation around identifying core competencies where even the big banks would want to acqusmaller ones to gain scale against probable new entrants.

What will be the motive behind acquisition?

Strategy of network expansion through the inorganic route. Getting into key geographies. Escape the long period of building from scratch. The advantage of size.

What criteria the big boys may look at?

Low promoter holding.

Strong regional presence. Low level of NPAs. Adequate capitalization. Reasonable CASA base. Low Cost-to-Income ratio.

Microsec Reseth October’ 2010

t – Abhisek Sasmal-3051-2000mal@microsec.in Microsec Research reports are also available on Bloomberg <MCL

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We have studied the following listed private sector banks, that we think are the likely takeocandidates:

Core Operational & Financial data Market Data

R Crs (FY'10) Total Revenue Deposits AdvancesYield on

Advances(%) NIM(%)PAT

Margin% EPSNo of 

Branches

evenueper 

Branch Mcap (INR) Mcap/BranchB

Va

1012.88 9075.38 6277.50 14.49 2.38 3.37 3.15 251 4.0 758.6 3.0

2354.68 23730.65 14435.68 14.16 1.24 8.18 12.47 464 5.1 1605.0 3.5

625.56 7098.48 5006.26 10.68 1.74 4.36 3.63 270 2.3 852.1 3.2

1100.11 10284.59 6833.46 14.00 2.41 15.97 3.82 222 5.0 1140.8 5.1

2004.92 19271.85 13497.50 13.02 2.57 19.12 61.75 312 6.4 2493.3 8.0

3260.47 26710.17 20550.59 13.17 2.51 12.94 8.53 209 15.6 7004.4 33.5 2144.18 23011.52 15822.92 12.23 2.23 12.08 20.69 580 3.7 2014.9 3.5

4204.14 36057.95 26950.11 13.63 3.23 12.65 27.16 672 6.3 4565.7 6.8

566.49 4787.33 3459.71 13.28 2.31 -17.08 0.00 90 6.3 644.0 7.2

Key Financial Ratios

'rs ost ncome at o re t epos ts ota er- rat o

52.87 69.17 18.22 NA NA NA 0.33 5.14

59.68 60.83 23.26 12.37 9.98 1.31 0.67 9.88

83.29 70.53 21.86 12.99 8.80 0.84 0.34 5.39

39.33 66.44 21.86 13.46 12.41 6.58 1.47 20.5

42.94 70.04 23.53 14.49 12.88 0.23 1.72 22.6

51.11 76.94 23.67 15.33 9.65 0.50 1.11 19.5

47.14 68.76 23.13 15.39 12.42 0.39 1.02 16.9

As per our analysis, Karur Vysya, South Indian Bank & Federal bank (indicated in greenthe bill for an ideal takeover target. City Union bank, DCB also have a fair chance, howtheir high level of Net Non Performing Asset (NNPA as of March’10) can be a deter

Source: Company, ACE equity

34.86 74.74 26.19 18.36 16.92 0.48 1.13 10.3

80.62 72.27 35.36 14.85 11.93 3.11 -1.30 -14.5

factor.

After taking everything into consideration we may see stiffer competition within the sectocoming years.

Refer our part - 1report on August’14th (Likely contender in the NBFC space)http://www.microsec.in/Static/Pdf/634174029912798000_RBI%20Bank%20License.pdf 

Microsec Researchicrosec Researchth October’ 2010

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