Next M&A target: Old private banks

There are many old private sector banks which are in existence for over a century. Some of them such as Bank of Madura, Bank of Rajasthan, Lord Krishna Bank, Vysya Bank already joined the consolidation process in the last two-and-a-half decades. Some of the old private sector banks (OPSBs) became the target of acquisition by large new private sector banks (NPSBs) as some of these NPSBs preferred to quicken the pace of their growth through inorganic route.

Now the time is ripe for more consolidation involving these OPSBs as nearly 60% of these existing banks have individually attained the business size of over Rs 1 lakh crore.

However, most of these banks still remain largely public owned without any identifiable promoters holding any meaningful equity stakes in them. As these banks are six to 10 decade old, the promoters’ stakes in them got diluted a lot over the generations. In many of them, the public stake is 100% and in some of them the promoters’ stake is as low as 2%. Unlike large private banks, individual stakeholders’ holding in these OPSBs is quite high. While in large private banks individuals collectively control around 8% to 11% stake, in some of these OPSBs, individuals together have dominating equity stakes of 36% to as high as 50%. Hence, it is quite possible for the authorities also to consider encouraging consolidation of such old private banks.

The industry credit growth itself has come down a lot due to structural issues to around 8% now. Though the banking credit growth for the latest reporting fortnight hit double-digit growth, it was mainly due to low base effect on account of demonetisation in 2016. Going forward, this crash in credit growth might make it quite difficult for the NPSBs to maintain the kind of credit growth they maintained in the past.

In the future it is going to be a tough task for some of the NPSBs to maintain very high interest margins, which they enjoy now.

In this background, now OPSBs joining the Rs 1 lakh crore business size may become an interesting trigger for accelerated M&As in this space. Some of these OPSBs have retained the customers for the generations and also built a loyal customer base among NRIs.

Hence, it would be worthwhile to consider these banks for investments without compromising on valuation and quality of assets.

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