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M&A (merger and acquisition) transactions in the Indian banking space may no longer be driven by the need to expand branch network. The Reserve Bank of India's (RBI) decision to deregulate branch licensing will probably tempt lenders in evaluating other metrics – like liability base and product portfolio – before concluding an acquisition.
"Historically, the branch network was the key determinant to arrive at an acquisition multiple, but with the RBI deregulating branch licensing this metric could now take a back seat. We believe strong liabilities, niche products and a profitable priority sector business will be the key drivers for future M&A," Saikiran Pulavarthi, an analyst with Espirito Santo Investment Bank, wrote in his note to clients.
In October, 2013, the banking regulator had relaxed the branch authorisation policy for Indian banks. It allowed domestic lenders to freely open branches in tier 1 to tier 6 centres without having the need to get permission from RBI, subject to certain conditions being met.
Also, RBI in its recently released guidelines has said foreign banks choosing to set up wholly-owned subsidiaries (WOS) here will be given 'near-national' treatment in branch opening provided their home countries provide similar treatment to Indian lenders.
"We believe these two policy changes will have a profound impact on the competitive landscape of the banking system in India," Pulavarthi said.
The investment bank believes private lenders like ING Vysya Bank, Fedaeral Bank and DCB Bank could be the top acquisition targets.
"ING Vysya Bank is our top pick on the M&A theme as we foresee two possibilities: (a) ING NV further increasing its stake to the permissible 74% FII (foreign institutional investor) limit or (b) ING NV completely selling its stake to another foreign bank. Given that ING NV earned an IRR (internal rate of return) of 17% in Indian rupee and 13% in US dollar terms since it gained management control in 2002, we assign higher probability for ING NV further increasing its stake," Pulavarthi said.
Kerala-based Federal Bank with a strong liabilities franchise, large branch network and non-resident deposit base is another likely candidate for acquisition. However, almost 95% of the lender's workforce is unionised, which would be a big consideration for acquirers.
Espirito Santo also felt that DCB Bank's clean balance sheet and conservative stance should appeal to foreign bank that are planning to scale up India operations.
