UTI Bank seems to have a new suitor in the form of global financial services giant HSBC. HSBC, through one of its subsidiaries, has entered into an agreement to pick up 14.7% stake in UTI Bank from CDC Capital partners, with an option to pick up another 5.4% from the latter. While it may be too early to declare the beginning of a new round of consolidation in the banking sector, we try to analyse the nature of the HSBC deal and the pricing of the deal.
UTI Bank is one of the largest private sector banks in the country and is promoted by group of institutions (UTI, LIC and GIC) in 1994. UTI Bank is the first private sector bank in the post liberalization era. Over the last five years, the bank's interest income and earnings have grown at a CAGR of 60% backed by its strong relationship with its promoter institutions. It has a branch network of over 190 and a large ATM network of over 1,000. It offers a wide array of services to both retail as well as corporate clients. The bank has been aggressive on the ATM front, mainly in order to expand its reach within the country.
For HSBC, this minority acquisition (and a possible takeover in the future) means that gives it a strong branch as well as ATM network in the country that it can leverage to grow its business in the future. Moreover UTI Bank is one of the fastest growing banks in the country, with reasonably good asset quality (net NPA as a percentage of net advances stood at 1.9% in FY03) as well as high level of technological integration. Hence, this acquisition is likely to benefit HSBC immensely in the long-term.
As far as the open offer price of Rs 90 per share is concerned (regulatory approval awaited), it amounts to an adjusted price to book value ratio of 2.5x. Based on our estimates, it trades at a price to book ratio of 1.8x its FY04 book value. The stock has traded in a price to book ratio range of 1.3x to 1.8x and based on this, the open offer price seems reasonable. At the current juncture, this HSBC deal may indicate to a larger trend of possible consolidation that may occur in future. However, we would like to caution investors and expect them to refrain from making investments in private sector banking stocks based purely on the 'consolidation story'.
Axis Bank declared the results for the third quarter of the financial year ended March 2017 (3QFY17). The bank has reported 4.1% YoY growth in net interest income while net profits declined 73.4% YoY in 3QFY17.
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