Consolidation in BFSI: Focus to be more on banks rather than on NBFCs

IDFC Group (which includes IDFC Bank) has announced an agreement to evaluate a potential combination of certain businesses and subsidiaries / affiliates / associate companies of the Shriram Group engaged in the credit and non-credit financial services sector with the IDFC Group. This kind of consolidation is expected to gain further momentum going forward.

Over the last two-and-half decades, the New Private Sector banks (NPSBs) have grown aggressively, especially in the early stages, partly by acquiring smaller private banks, and finance companies. NPSBs like ICICI Bank, HDFC Bank, etc., acquired smaller banks like Bank of Madura, Bank of Rajasthan, Lord Krishna Bank, Bank of Punjab, Centurion Bank, Vysya Bank, etc. While some NPSBs opted for acquisition of smaller banks, IndusInd Bank opted to merge its group finance company (NBFC) for inorganic growth at the early stage.

Banks are, of course, going through structural problems now – credit growth has crashed to poor single digit of 5% to 6% at present. For some large private banks margins also have shrunk. Hence, there is a case for large banks to evaluate inorganic route to grow. However, going forward, such possible inorganic growth strategy could involve more of banks rather than NBFCs as except the profitability, smaller banks score over NBFCs on many grounds.

Though banking credit growth has crashed, they have highly diversified lending book as against general trend of lending getting focused on select sectors in the case of NBFCs. Banks have access to public deposits for which some of the NBFCs are constrained. Especially low cost (CASA) deposits, which vary from 20% to 30% of total deposits for the midsized private banks, become the unique cost advantage for the banks which NBFCs completely lack. Most smaller private banks also have readily available internet banking platforms and also solid net work of ATMs.

However, most regional private banks trade much cheaper than the NBFCs - as compared to 2.5 to 7 times valuations enjoyed by the NBFCs, many smaller private banks are available at 1 to 2.5 times Price to Adjusted Book Value. Some of the private banks with lending book size of Rs.40,000 crore to Rs.50,000 crore are available at a market cap of 9% to 13% of their lending book size. On the other hand, some of the NBCFs are traded at market cap of 35% to 70% of their lending book size! Hence, going forward, further consolidation in the BFSI (banking and financial services industry) space is ,ore likely to be focused on attractively valued regional private banks rather than on the costly NBFCs.

The writer is founder and managing director, Equinomics Research & Advisory Pvt Ltd