Small private banks in spotlight after Lakshmi Vilas Bank-Indiabulls merger

Mumbai: The huge valuation premium given to Lakshmi Vilas Bank and merger potential of other banks are driving up investor sentiment

The Street is keenly awaiting the Reserve Bank of India’s (RBI’s) decision on the merger of Lakshmi Vilas Bank (LVB) and Indiabulls Housing Finance, which was announced earlier this month.

While some may be extrapolating from the market buzz and the RBI’s clarification that came after the merger was internally approved of by the two lenders, the move, if the regulator approves, is likely to bring stocks of other old small private lenders in focus. The old small private sector banks include Karur Vysya Bank, Karnataka Bank,

South Indian Bank and Dhanlaxmi Bank.

Stocks of many of the above-mentioned banks had fallen by 14-30 per cent in the last one year as against a 20 per cent surge in the Nifty Bank index. This fall was mainly due to asset quality concerns. Yet, what leads the Street to focus on these small old private lenders is the fact that despite LVB being a loss-making entity, Indiabulls Housing has offered 36 per cent premium to the former’s valuation based on the share swap ratio and FY19 estimated book value.

“If the merger gets through the RBI, intuitively it may renew interest in smaller banks’ stocks. Quite a few of the old small & regional private banks may be inclined to explore merger/acquisition possibilities if they get good valuations,” says Lalitabh Srivastava, AVP at Sharekhan..

In fact, LVB’s adjusted book value (net worth minus net non-performing assets) was negative as of December 2018. Under the proposed merger, the valuation of LVB, which has a strong presence in south India with 569 branches, is also two-three times higher than that of the above-mentioned banks, which also have relatively better performance matrix. This clearly spells potential valuation premium for these banks, although some market experts believe that strategic value creation expected from the LVB-Indiabulls Housing deal justifies the valuation for LVB.

Asutosh Misra, head of research-institutional equity at Ashika Stock Broking, says there would be more instances of non-banking financial companies (NBFCs) looking for merging with old private banks if the RBI approves the LVB-Indiabulls Housing deal.

The recent IDFC Bank-Capital First deal shows that merging with or acquiring a bank is a way for NBFCs to quickly get a banking license and mobilise public deposits. Not long back, IndusInd Bank, too, acquired Bharat Financial Inclusion. This trend is expected to continue. In the present scenario, for instance, Dhanlaxmi Bank could be another acquisition target of an NBFC, say experts.

At the same time, acquisition/merger by other strong banks for inorganic growth cannot be ignored given the strong presence of these old private banks in their respective regions.

According to G Chokkalingam, founder of Equinomics Research and Advisory, after demonetisation and with direct transfer of subsidies, banking penetration mainly in the urban pockets has almost peaked out. Also, new scheduled commercial banks, which emerged from micro-finance/ cooperative banks, could eventually target old private sector banks to expand their business.

There is a history of large private lenders acquiring old private banks. For instance, ICICI Bank had acquired Bank of Madura in 2001 and Sangli Bank merged into ICICI Bank in 2007. Further, Centurion Bank of Punjab was amalgamated into HDFC Bank in 2008. These had helped the large peers to expand their geographic reach, customer base, etc.

Apart from this, very small promoters’ stake in many of these old private banks is only adding to the possibilities of these banks getting merged into or acquired by other banks or NBFCs. While promoters’ stake of Karur Vysya was two per cent as of December 2018, it stood at zero for Karnataka Bank and South Indian Bank as of March 2019. Experts believe even the regulator would be interested in letting such banks move in hands of other reputed players.

Overall, the RBI’s word is likely to be a deciding point even for old private banks’ stocks besides LVB and Indiabulls Housing Finance.

 

 

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.