Bulls lap up Karnataka Bank on deal buzz

Despite denials by parties in question, market gives credence to reports about M&A with ICICI Bank stock hits new annual high

The share price of Karnataka Bank is enjoying a bull run on the exchanges. Speculators are pushing up the stock of this mid-sized Mangalore-based lender on rumours of its likely acquisition and merger with a top private sector bank in the country, said equity brokers here.

The stock on Monday rallied to a new annual high and closed with gains of 11.4 per cent or Rs 20 at Rs 195.7, valuing the entity at Rs 3,685 crore. Last year in December, it was valued at just around Rs 1,250 crore, when the stock was trading around Rs 64.

ICICI Bank is said to be aggressively trying to acquire and merge Karnataka Bank with itself, as it did with the Bank of Rajasthan a couple of years earlier, say market players. However, both Karnataka Bank and ICICI Bank had strongly denied the rumours. Brokers say the rise in the share price even after the denial shows the markets are not taking these statements seriously.
 

THE DEAL BOOK

Year AcquirerTargetBranches of
target bankPrice to book
(Book value) Aug-10ICICI BankBank of 
Rajasthan4634.8 Feb-08HDFC BankCBoP3944.9 Apr-07ICICI BankSangli Bank1983.7 Aug-06CBoPLord Krishna
Bank1101.9 Oct-05Centurion 
BankBank
of Punjab1361.9 Source: Reports from of CNI Global Research

“The frenzy in the counter is not entirely meaningless. There is a certainty over a change of hands for Karnataka Bank,” said S P Tulsian, an independent equity analyst.

Foreign institutional investor (FII) Barclays Capital Mauritius on Monday bought 1.2 million shares of Karnataka Bank for Rs 22.54 crore, a 0.61 per cent stake, with the shares bought at Rs 194.31 apiece. The identity of the seller could not be ascertained. These shares are widely distributed, with Kotak Mahindra Investment, an arm of the Kotak Mahindra Bank, being the largest shareholder with 3.37 per cent stake. Other top holders are Arch Finance, Religare, Life Insurance Corporation of India, Macquire Bank and Bajaj Holdings. FIIs had 23.95 per cent in Karnataka Bank in the September quarter of 2011 and had pared their stake to 14.36 per cent till June this year. It then rose again, to 16.4 per cent in the September quarter.

Banking sector stocks have been in focus for the past few weeks, on anticipation that the banking laws amendment Bill, aimed at making merger and acquisition for existing banks easier, and also result in new banking licences, which would be tabled in the Parliament. It was tabled on Monday but faced opposition from various political parties. The BSE Bankex, the benchmark banking index, rose 0.3 per cent and was the third top gainer among sectoral indices.

“If the banking amendment Bill is passed, merger and acquisition activity for the banking sector will happen on a scale and speed that India has not seen before,” said Kishor Ostwal, managing director of CNI Global Research, that had put out a buy report on Karnataka Bank on October 29.

Analysts say the key for valuation analysis in such banks is their reach, based on their branches. Karnataka Bank has 550 branches in 21 states and two Union Territories. “At the current share price, each branch (of this bank) is valued at Rs 7.8 crore, which looks fair,” said Tulsian.

Bank of Rajasthan, which got merged with ICIC Bank after a deal in 2010, had 463 branches. Centurion Bank of Punjab, which got merged with HDFC Bank in 2008, had 394 branches. In 2007, Sangli Bank with 198 branches was merged with ICICI Bank.

Karnataka Bank’s quarterly net profit in September nearly rose threefold to Rs 117 crore, aided by higher net interest income of Rs 233 crore.