1. 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 Banking
Licenses in August, 2010. The discussion paper was a continuation of an earlier version mentioned in
the RBI’s Annual Policy Statement for the year 2010-11.The current discussion paper highlighted the
norms/suggestions/feedback for Industrial and business houses to enter into the banking sector among
many other related issues Recently more and more industry associations such as FICCI Assocham and
issues. FICCI,
CII made a pitch for allowing industrial houses that have experience and good track record in financial
services to set up banks.
Impact: According to the norms earlier promulgated, the possibility for Industrial Houses to be
allotted with Banking Licenses looked remote. However, the RBI may allow the Corporate Houses to
bid for Banking Licenses but with a strict shareholding which may limit their influence on the
decision making with respect to large size financing. Also, Industrial Houses with rural focus may be
given a chance to set up banks.
Consolidation is a key catalyst for the modern banking industry to leverage the benefits of large size,
expand and diversify large bank loan portfolios to lessen the likelihood of failure and harness core
competencies. In the recent time, the Indian banking sector has witnessed a lot of M&A actions. Some
of the recent M&A activities in the Indian Banking Industry are: ICICI Bank’s control of a regional
player, Bank of Rajasthan; the merger between IDBI (Industrial Development bank of India) and its
own subsidiary IDBI Bank, merger between Centurion Bank and Bank of Punjab, Rabobank’s part-exit
from Yes Bank to make way for the Dutch Group’s solo India venture; entry of Japan’s Sumitomo
y p y J p
Mitsui through a 4.5% stake in Kotak Mahindra Bank. If big corporate houses are allowed to enter the
banking space, the banking industry would then slowly but surely move from a regime of ‘large
number of small banks’ to ‘small number of large banks’. The new era is going to be one of
consolidation around identifying core competencies where even the big banks would want to acquire
smaller ones to gain scale against probable new entrants.
q
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 h ldi
holding.
 Strong regional presence.
 Low level of NPAs.
 Adequate capitalization.
 Reasonable CASA base.
 Low Cost-to-Income ratio.
Analyst – Abhisek Sasmal
033-3051-2000
asasmal@microsec.in Microsec Research reports are also available on Bloomberg <MCLI>
8th October’ 2010 Microsec Research

2. We have studied the following listed private sector banks, that we think are the likely takeover
candidates:
Core Operational & Financial data Market Data
Revenue
R Price
Pi /
Yield on PAT No of per Book
INR Crs (FY'10) Total Revenue Deposits Advances Advances(%) NIM(%) Margin% EPS Branches Branch Mcap (INR) Mcap/Branch Value(x)
Lakshmi Vilas Bank Ltd. 1012.88 9075.38 6277.50 14.49 2.38 3.37 3.15 251 4.0 758.6 3.0 1.0
Karnataka Bank Ltd. 2354.68 23730.65 14435.68 14.16 1.24 8.18 12.47 464 5.1 1605.0 3.5 0.9
Dhanalakshmi Bank Ltd. 625.56 7098.48 5006.26 10.68 1.74 4.36 3.63 270 2.3 852.1 3.2 1.9
City Union Bank Ltd. 1100.11 10284.59 6833.46 14.00 2.41 15.97 3.82 222 5.0 1140.8 5.1 1.4
Karur Vysya Bank Ltd. 2004.92 19271.85 13497.50 13.02 2.57 19.12 61.75 312 6.4 2493.3 8.0 1.1
IndusInd Bank Ltd. 3260.47 26710.17 20550.59 13.17 2.51 12.94 8.53 209 15.6 7004.4 33.5 3.2
South Indian Bank Ltd. 2144.18 23011.52 15822.92 12.23 2.23 12.08 20.69 580 3.7 2014.9 3.5 0.1
Federal Bank Ltd. 4204.14 36057.95 26950.11 13.63 3.23 12.65 27.16 672 6.3 4565.7 6.8 1.0
Development Credit Bank Ltd. 566.49 4787.33 3459.71 13.28 2.31 -17.08 0.00 90 6.3 644.0 7.2 1.2
Key Financial Ratios
INR C (FY'10)
Crs Cost I
C Income Ratio
R i Credit/Deposits(%)
C di /D i (%) CASA (%) Total
T l CAR (%) Tier-1 i
Ti 1 ratio NNPA% ROA(%) ROE(%)
Lakshmi Vilas Bank Ltd. 52.87 69.17 18.22 NA NA NA 0.33 5.14
Karnataka Bank Ltd. 59.68 60.83 23.26 12.37 9.98 1.31 0.67 9.88
Dhanalakshmi Bank Ltd. 83.29 70.53 21.86 12.99 8.80 0.84 0.34 5.39
City Union Bank Ltd. 39.33 66.44 21.86 13.46 12.41 6.58 1.47 20.55
Karur Vysya Bank Ltd. 42.94 70.04 23.53 14.49 12.88 0.23 1.72 22.63
IndusInd Bank Ltd. 51.11 76.94 23.67 15.33 9.65 0.50 1.11 19.51
South Indian Bank Ltd. 47.14 68.76 23.13 15.39 12.42 0.39 1.02 16.99
Federal Bank Ltd. 34.86 74.74 26.19 18.36 16.92 0.48 1.13 10.32
Development Credit Bank Ltd. 80.62 72.27 35.36 14.85 11.93 3.11 -1.30 -14.58
Source: Company, ACE equity
As per our analysis, Karur Vysya, South Indian Bank & Federal bank (indicated in green) fit
the bill for an ideal takeover target. City Union bank, DCB also have a fair chance, however
their high level of Net Non Performing Asset (NNPA as of March’10) can be a deterring
factor.
f
After taking everything into consideration we may see stiffer competition within the sector in
coming 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
8th October’ 2010 Microsec Research Research
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