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Banks: Consolidation picking up? - Views on News from Equitymaster
 
 
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  • Feb 24, 2003

    Banks: Consolidation picking up?

    The re-rating of the Indian banking sector has happened due to a number of factors and one of them is the consolidation potential in the industry. Reports indicate that Corporation Bank, a leading public sector bank is looking to acquire stake in another leading private sector bank, UTI Bank. Those it is early days yet, we look at the benefits for both these banks if the deal goes through.

    Bank Year Merged with
    Times Bank 1999 HDFC Bank
    Bank of Madura 2000 ICICI Bank
    ICICI Ltd 2002 ICICI Bank
    Nedungadi Bank 2002 Punjab National Bank

    For Corporation Bank this seems more like a measure of investing its surplus funds. This is due to the fact that the bank has a capital adequacy ratio (CAR) of nearly 22% compared to the RBIís stipulated level of 9%. Moreover, Corporation Bank is likely to get a stake in a bank that has managed to grow its net earnings at a CAGR of 55% in the last five years.

    As far as UTI Bank is concerned, the preferential allotment of shares will enable it to raise capital which it very desperately needs. This is due to the fact that the CAR of UTI Bank is low at around 9.7% which is just above the stipulated 9% RBI Limit. UTI Bank has been very aggressive as far as advances are concerned and hence if the bank has to maintain the same rate of growth in its earnings it needs to grow at a fast rate. For this the bank needs better CAR so that it can grow its advances at a faster rate. By infusing more capital into UTI Bank, Corporation Bank may help ensure (to an extent) that these growth rates are maintained. So the deal if it happens, may turn out to be a win-win situation for both.

    At this stage any assumption on this particular deal is likely to be mere speculation, but the fact is that consolidation in the industry is a reality. Banks are increasingly finding that in order to survive the competition they have to create a larger reach across the country. Moreover, weaker banks that have not been performing well are likely to be soft targets for larger banks. A good example of this has been the recent merger of Nedungadi Bank with Punjab National Bank. Also, FDI investment in PSU banks is not allowed beyond 20% of total equity currently. There are expectations that this limit will be eased in the forthcoming budget. If this turns out to be true, we are likely to see increased investments in this sector and a part of these investments may find their way into mergers and acquisitions.

     

     

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