• OUTLOOK ARENA
  • VIEWS ON NEWS
  • MARCH 28, 2002

Private Banks: Will M&A zing last?

Private banking stocks have rallied in the last three months and most of them are now trading near their 52-week highs. On the other hand, the Sensex declined by 3%, since the beginning of the current fiscal. Expectation of pick up in consolidation activity in the sector has injected buying interest in the sector.

Old generation private banks have nearly doubled in the last three months. Opening up the sector by increasing foreign direct investment limit, spurred activity in these counters. Federal Bank was the prominent gainer. Vysya Bank and J&K Bank too witnessed a steep rise, as these banks were scouting for foreign partners. Bank of Punjab is the only loser over a period of one year due to instability in its financial performance.

Price change since
Particulars Apr-01 Jan-02
Bank of Punjab -5.1% 18.2%
Karur Vysya Bank 44.0% 76.7%
Federal Bank 131.2% 133.6%
Vysya Bank 116.6% 85.5%
J&K Bank 113.3% 75.1%

Among the new generation private sector banks, Global Trust Bank (GTB) and ICICI Bank were the losers. GTB's alleged involvement in the stock market during the KP hey days cast a shadow on its business and resulted in deterioration of financial performance. Lack of confidence on the management impacted its valuations severely. Meanwhile, ICICI Bank's price dropped after it announced the merger with its parent. However, both these stocks rallied to record sharp gains in the last three months. IDBI Bank attracted buying interest after the parent IDBI decided against merging with it.

Price change since
Particulars Apr-01 Jan-02
HDFC Bank 7.3% 6.5%
ICICI Bank -27.3% 34.4%
UTI Bank 62.0% 47.8%
IDBI Bank 60.2% 61.2%
Global Trust Bank -12.8% 30.4%

Interest income of the sector has been impacted severely due to a slowdown in credit off take resulting from downturn in the industrial activity. The Index of Industrial Production (IIP) grew by a mere 2.5% in the first 10 months of FY02. This was less than half the growth recorded in the comparable previous period. During the period April 2001 to February 2002, bank credit grew by just 13.6% as against 18.1% growth recorded a year ago. Industrial downturn is clearly reflected in this sluggish growth rates. During the same period, total deposits of banks grew at a lower rate of 14.4% on a YoY basis against 18.1% during the corresponding period of FY01.

Declining interest rates coupled with challenging environment pressurized interest margins of banks. As if this was not enough, escalation in non-performing assets due to subdued industrial activity contributed in lowering earnings growth. However, a cost reduction exercise (through VRS and implementation of IT plans) helped banks in maintaining their net profit growth.

Although, the sector has been banking on the immense growth potential in the retail finance segment, competition is likely to keep interest margins under pressure. Consequently, higher bottomline growth could come only from volumes and from fee based income (included in other income). Since the performance of the sector is directly related to GDP growth (which is forecasted to be about 5%), an improvement in economic growth and industrial activity could only bring improvement to the financial performance of the sector. The current high valuations of private banks are likely to be unsustainable in absence of stable financials.

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 (Research Analyst) bearing Registration No. INH000000537 (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, Canada or the European Union countries, 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 (Research Analyst)
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