Thanks to the increase in FDI limit in banks, the spotlight is on small private sector banks once again
Banking stocks have been in the limelight for quite some time now. Way back in November 1999, new age banks like ICICI Bank and the HDFC Bank were most sought after.
Their innovative approach looked set to alter the face of the entire banking sector. A few acquisitions by these banks turned the spotlight on small private sector banks that appeared to be ripe for a take-over.
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Small bank stocks rose substantially riding on the consolidation story in March to April last year. Then came the broad-based rally as banks recorded huge treasury gains riding on falling interest rates.
Towards the end of 2002, it was the turn of public sector banks, which rose in celebration of the Securitisation Bill. Come March 2003, the consolidation story is back.
The government's decision to relax the FDI limit to 74 per cent in this year's Budget, analysts and industry officials say, will trigger a flurry of activity in the banking sector.
Analysts are bullish on small private banks. In many cases, the increase in the FDI limit has not altered anything, but stocks are back in the reckoning, riding high on buoyant sentiments.
Says Rajiv Sampat, director, Parag Parikh Securities: "Small banks were always a target for takeovers by large private sector banks." The increase in foreign investment limits has only brought them back into focus.
Many small private sector banks boast of up-to-date technology, a strong branch network and healthy financials. The only point going against them may be their regional concentration.
But analysts say that does not lessen their attractiveness in any way. Says Sejal Doshi of Tower Caps: "The regional concentration of small banks would not worry the big players as they would be more interested in getting a ready branch network in the country."
Besides, the fact that acquiring small banks will entail lesser capital investment also makes them ideal targets.
Says Doshi: "Takeovers of small banks require less capital, making them easier targets." Here are a few small banks analysts are really hot on.
Karur Vysya Bank
Analysts are optimistic on the stock because of the low promoter holdings in the bank. The promoters hold 4.59 per cent. The institutional holding in the bank is also low at 6.78 per cent. This has increased the optimism associated with the bank.
However, some bank officials say that there are practical issues in taking over a bank with low promoter holding or no identifiable promoter.
The bank's network is concentrated in Tamil Nadu with more than 60 per cent of its branches situated in the state. As stated above, analysts do not expect this to be much of a problem since it can be increased with a fresh inflow of funds.
The only factor that could stand in the way is the increase in non-performing assets (NPA) of the bank.
Its net NPAs increased to 6.33 per cent for the year ended March 2002, deteriorating from 4.74 per cent. However, a major positive is that 85 per cent of its 208 branches are computerised.
The capital adequacy of the bank stands at a comfortable 16.90 per cent, reducing the necessity of a fresh inflow of funds.
Therefore, analysts expect that the foreign inflow will be routed through investment in existing shares of the bank.
Federal Bank
The bank's story is similar to Karur Vysya Bank. As on December 2002, the shareholding pattern indicated that there was no individual or group that could be called the bank's promoters.
The similarity is more pronounced when one observes that, like Karur Vysya, 80 per cent of its branches are automated. The bank is concentrated mainly in Kerala.
Since people from Kerala form one of the largest groups of people who have emigrated from India, the amount of business that the bank does with people outside India had to be large.
Centurion Bank
The bank has been awash with problems for the past couple of years. The problems started when it merged with its parent which had NPA