Private bank scrips in focus

Investors may make a beeline for shares of private sector banks once again following finance minister P Chidambaram's statement Friday favouring greater freedom for foreign banks with regard to acquisition of Indian banks. However, the market is not very optimistic about mergers among public sector banks.

For that matter, not many players are hopeful about public sector banks taking over private sector banks, though the finance minister said they would be encouraged to do so.

Chidambaram had said foreign banks will be allowed to take control over private sector banks in India over the next 3-4 years and that they would be allowed to acquire up to 10 per cent a year in a private sector bank.

The announcement saw UTI Bank shares climbing over 9 per cent , before settling 6 per cent higher on Friday. Among other private sector banks, Karnataka Bank, Federal Bank, Karur Vysya Bank and South Indian Bank closed between 2-4 per cent higher.

The market is hoping the move will have foreign banks sniffing for potential buy-out candidates. And their optimism may not be misplaced.

"While our strategy for organic growth has played out well, we would enhance and explore opportunities that arise from such a move," Sajay Nayar, chief executive officer, Citigroup India, told Crisil MarketWire. "We await final RBI (Reserve Bank of India) guidelines," he said.

Stocks that ended lower Friday included Bank of India, Canara Bank, Vijaya Bank, Andhra Bank and Maharashtra Bank-from tad lower to as much as 3 per cent.

This is because the market is not convinced that the consolidation in the public sector banking domain will necessarily result in synergies, though it may result in creation of larger entities.

"The finance minister's statement clearly indicates that the government will facilitate mergers involving public sector banks, and not force them," said P.S. Shenoy, chairman and managing director, Bank of Baroda.

But many analysts disagree.

"You may merge two state-owned banks, but not close down a single branch or fire a single employee, so what synergies can you hope to achieve," said an analysts at a foreign brokerage which has been maintaining a bearish view on the sector for some time now.

The market view is that consolidation in the sector is a must, given that there are far too many players right now.

According to the latest Business Standard Banking Annual, there are 290 commercial banks, 90 scheduled commercial banks, with a total of 69,071 branches.

However, analysts feel a consolidation would be meaningful if smaller state-owned banks are acquired by private players, rather than state-owned players.

"PSU bank mergers will be relatively easy to execute as government holding in most PSU banks is a high 60-100 per cent , mergers will be relatively simple to execute," said a note by investment bank CLSA Asia-Pacific recently.

"Synergistic benefits are unlikely to be quickly available given constraints on restructuring (lack of freedom to rationalise branch network and manpower duplication)," said the CLSA Asia-Pacific note, adding that most banks were saddled with excess manpower.

"With only limited near-term gains likely from consolidation moves among PSU banks, we maintain our preference for the private banks," the note said.