Banking: Surrounding M&A rumours

The private banking sector is witnessing a rapid consolidation to maximize synergies. The markets are already speculating a new round of consolidation with the banking behemoths out on the street with their shopping bags.

New private banks ICICI Bank and HDFC Banks are scouting for acquiring the new private sector banks with good operating efficiencies. This would be their second acquisition after the earlier merger of Times Bank with HDFC Bank and Bank of Madura with ICICI Bank.

ICICI Bank is speculated to have initiated talks with the Banglore based Vysya Bank and Kerala based Federal bank. HDFC Bank on the other hand is learnt to be in talks with three other private sector banks Global Trust Bank (GTB), UTI Bank and Bank of Punjab for a possible merger.

Apart from this, there is another set of banks, which are looking out for strategic partners. This is to divest promoter’s holding in the bank as per the RBI guidelines, which states that promoters stake in the bank should be less than 40%. The list of such banks includes IndusInd Bank, UTI Bank and IDBI Bank.

Coming back to M&A plans of the premier private sector banks south is the attractive destination. This is considering the fact that business opportunities and level of income is comparatively higher in the south compared to north. While both Vysya Bank and Federal Bank have majority of their branches located in the south, Bank of Punjab is a North India based bank. On the other hand UTI bank and Global Trust bank have branches spread all over the country.

Considering the current attractive valuations of these banks and improvement in operating efficiencies, acquisition makes sense for both ICICI Bank and HDFC Bank. Also, it will be practically impossible to widen the branch network in the short period considering the RBI regulations and investment in infrastructure. Although, mergers look attractive prima facie, integration of technology and employees plays a major role. Apart from this, other factors like the level of non-performing assets (NPAs), capital adequacy ratio (CAR) and financial performance determines the valuations to be accorded to the merger. We have tried to compare the key financials of banks, which are likely takeover targets.

As can be seen from the table, valuations wise these banks look attractive. However, the higher level of NPAs could lead to comparatively low acquisition price for these banks (merger ratio in favour of shareholders of acquiring banks). This is considering the fact that both HDFC Bank and ICICI Bank have relatively low NPA ratio of 0.5% and 1.4% respectively and high earnings growth. Also, both the banks have implemented latest technology and offers wide range of products. Nevertheless, in the short-term we might see actions on the stock price of these banks (before the actual acquisition announcement is made and merger ratio is confirmed). Till then wait and watch without getting carried away in the merger rumours.