IndusInd Bank has formally announced the acquisition of Bharat Financial Inclusion. The valuation of this acquisition is over 5 times Bharat Financial’s adjusted book value as on March 31, 2017, and 53 times its net profit in FY2017. Such attractive valuation could possibly trigger a lot more acquisitions in the banking and financial services sector going forward.

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Some of the new large private banks are trading at 4 to 5xeir book values. Till now they have been growing their business by around 35% year-on-year. However, the banking industry credit growth, which used to grow over 13% some years ago, now growing at poor single digit of around 7%. Hence, for some of these large private banks, it could be difficult to maintain such high credit growth in the future at such huge variation with the industry’s average credit growth rates. Therefore, it may be difficult for some of them to command such high valuation (4x to 5x adjusted book values) in the markets in the future.

As compared to micro-finance companies, most of the old private sector banks have a successful history of eight decades to over 100 years in the country. Many of these banks have also reached a critical business size of around Rs.1 lakh crore now. They also have a diversified lending portfolio unlike many financial services companies, which are focused on select lending segments. In addition, these banks have access to cheap public deposits which most NBFCs lack. Moreover, many of these OPSBs trade at mere 1.2 to 2.5 times their adjusted book values as compared to a valuation of 4 to 5 times Price to Adjusted Book Value enjoyed by the large private banks and non-banking finance companies (NBFCs).

In the last two decades, many new NBFCs spanning segments like micro-finance have mushroomed – however, in the banking space, we have seen just one or two players. Hence, while there are many options in the NBFC segment for consolidation, it is highly limited in the private banking space.  In this environment, attractive valuation given to the micro-finance company could trigger possible consolidation involving OPSBs.

In the last 25 years, we have already seen many old private banks being acquired at valuation multiples of 2.5 to over 4 times by the large private banks. The latest September results published so far also indicate that the net non-performing assets have peaked out for some these old private banks. Hence, perhaps now the time is ripe for such consolidation to get renewed thrust and for the investors to get wealth creation opportunities in the old private sector banking segment.

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