Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Banks: Enroute to consolidation - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Dec 24, 2004

    Banks: Enroute to consolidation

    It is inevitable! In the Indian banking scenario, consolidation is the next step for evolution.

    A look at the international scene suggests that, size does matter. To put things in perspective; State Bank of India is three times the size of Bank of America (BoA). SBI is reaching 90 to 100 m customers while BoA has 30 m customers. But if you look at assets, BoA has more than a trillion dollar of assets as against SBIís asset size of Rs 4,000 bn. That gives BoA the muscle to cut costs and amplify earnings.

    The statistics for total loans to GDP ratio also draws a sorry picture of the Indian banking industry.

    As net interest margins get thinner, the need for more sophisticated products and low-cost technology is felt. The only answer to this is to create synergies by consolidating with complimenting entities

    To trigger the next phase of consolidation in the banking sector, the Reserve Bank of India is expected to draw a fresh set of guidelines later this month. It is believed that the new draft guidelines will encourage foreign banks to acquire stakes in Indian banks. The government has clearly indicated that more capital from private and foreign banks is needed to make the banking sector robust.

    There are several foreign banks, which are yet to start their operations in India and are looking at strategic alliances to make their presence felt in India. There are 29 private banks in the country. Of this, around 15 are envisaging to raise resources in the near future. Once the government comes out with clear guidelines, these banks will either go in for IPOs, seek strategic alliances or placements with private equity funds. It is also expected that most of the profitable private sector banks will fall prey to a takeover bids by their brawny counterparts.

    The question now is, which are the possible targets for takeover and what are the likely benefits expected from them? The following analysis seeks to answer this.

    J & K Bank IndusInd Bank Karur Vyasa Bank Bank of Rajasthan Bharat Overseas Bank
    FY03 FY04 FY03 FY04 FY03 FY04 FY03 FY04 FY03 FY04
    Advances (Rs m) 80,109 92,849 53,478 78,122 33,444 40,232 22,212 24,316 11,531 13,915
    Deposits (Rs m) 146,749 186,613 85,978 112,002 51,219 59,114 52,992 74,059 21,491 24,715
    Profitability %
    ROA 2.1 2.1 0.9 2.1 2.2 2.4 1.3 1.0 1.3 1.3
    ROE 31.0 28.7 15.5 37.4 25.3 25.4 26.4 22.5 21.7 22.5
    Net Profit / Spread 64.2 65.6 48.9 82.7 73.9 54.2 37.8 36.4 47.1 41.1
    Net Profit margin 19.7 22.3 9.0 19.7 19.3 22.3 11.4 10.2 13.5 15.2
    Quality of Assets %
    CAR 16.5 16.9 12.1 12.8 17.0 17.1 11.3 11.2 13.9 16.3
    NPA / Net Advances 1.6 1.5 4.3 2.7 4.2 2.3 6.9 3.0 3.3 2.3
    Avg cost of deposits 6.3 5.3 6.0 5.1 7.1 6.0 6.2 4.9 5.7 4.8
    Avg yield on advances 9.1 8.0 7.4 7.9 9.1 9.8 8.6 6.9 7.7 7.6
    Productivity (Rs m)
    Income / Branch 37.7 38.3 188.8 218.2 30.3 32.3 17.8 19.2 26.8 28.7
    Income/ Employee 2.4 2.7 10.5 7.6 2.3 2.5 1.4 1.6 2.1 2.2
    Credit Deposit ratio 54.6% 49.8% 62.2% 69.8% 65.3% 68.1% 41.9% 32.8% 53.7% 56.3%
    Borrowings/deposits 1.5 1.6 2.8 2.1 5.2 1.8 0.3 2.4 2.6 0.7

    Jammu and Kashmir Bank is the first state owned bank of the country and 53% of equity is held by the government of J&K. The bank has a network of 475 branches spread over the country. During FY04, the bank recorded a 23% growth in its total revenues over the previous year. Although divestment on the part of the government is uncertain, the performance ratios of the bank surely makes it a good contender for acquisition.

    IndusInd Bank also is in the same league with an impressive networth growth (from Rs 3 bn to 8 bn) during the past six years. The total deposits and advances of the bank in FY04 grew by 30% and 46% respectively, faster than the industry growth rate. It has comparatively smaller branch network of 61 and 80 ATMs across the country. But at the same time, the bank has the highest productivity ratios amongst the Tier II private banks.

    The Karur Vysya Bank (one of the oldest private sector banks operating in India since 1916) has been ranked as one of the top five banks in the private sector. The bank has a strong hold in the South with a total of 216 branches across the nation. The bank has an impressive capital adequacy ratio and also boasts of a credit deposit ratio to the tune of 68%.

    Bank of Rajasthan having its network across 12 states, mainly concentrated in the north, has an edge in terms of relatively low cost of deposits. The bank has also successfully cleansed its assets by bringing down the net NPA / advances ratio from 7% in FY03 to 3% in FY04.

    Bharat Overseas Bank, a fast growing Chennai based bank is unique in the sense that it is promoted by seven other banks, namely, IOB, Bank of Rajasthan, Vyasa Bank, Karur Vyasa Bank, Federal Bank, South Indian Bank and Karnataka Bank. Established to take over from Indian Overseas Bank's Bangkok branch, it is one of the few private banks permitted by the Reserve Bank of India to have a branch outside India and is the only bank to represent India in Thailand. The bank has been able to leverage its overseas presence to access low cost deposits and this is reflected in the fact that its borrowings / deposits ratio have declined from 2.6 times in FY03 to 0.7 times in FY04.

    Let us clarify that the above 5 banks are just a few of the contenders of the consolidation process. In the long run, they may or may not be part of the M&A activity. The purpose of the article is only to highlight the facts.

    Fundamentally, a merger must satisfy its objectives. There needs to be an increment in market share, augmented scale, reduction in expenses and last but not the least, it has to be attractive to shareholders. The credibility of the acquiring entity and the complimenting benefit offered by the acquired target will together decide the fortunes of the shareholders.



    Equitymaster requests your view! Post a comment on "Banks: Enroute to consolidation". Click here!


    More Views on News

    SBI: Asset Quality and Slow Credit Remain Achilles' Heel (Quarterly Results Update - Detailed)

    Aug 22, 2017

    State Bank of India (SBI) continues to battle sliding asset quality and sluggish credit growth.

    IDFC Bank: Strong Trading Income Shields Credit Slowdown (Quarterly Results Update - Detailed)

    Aug 10, 2017

    IDFC Bank is taking steps to address contracting NIMs and successfully transition in to a retail bank.

    ICICI Bank: Loan Slippages Trending Downwards (Quarterly Results Update - Detailed)

    Aug 10, 2017

    Asset quality will be the key thing to watch out for going forward.

    Should You Take SBI Chief's Advice and Load up on SBI Shares? (The 5 Minute Wrapup)

    Jul 6, 2017

    Does the stock score on the value versus price equation?

    AU Small Finance Bank Ltd. (IPO)

    Jun 27, 2017

    Should one subscribe to the IPO of AU Small Finance Bank Ltd?

    More Views on News

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    It's the Best Time to Buy IT Stocks(Daily Profit Hunter)

    Aug 16, 2017

    The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 23, 2017 03:36 PM