Listed old private sector banks set to see valuation upgrades

On January 9, 2018, we had written "Next M&A target: Old private banks" as these banks have been going through consolidation process over the last two decades and some of them have crossed Rs 1 lakh crore business mark recently. Surprisingly, we saw in the media last week an announcement of Canadian investment firm Fairfax buying a 51% stake at a cost of Rs 1,200 crore in Catholic Syrian Bank (CSB), a much smaller old private sector bank (OPSB). This deal is reported to be at a price of Rs 140 per share.

The adjusted book value of CSB stood at Rs 49.38 per share as of September 30, 2017, and hence, this deal gives a valuation of 2.8 times price to adjusted book value (ABV). This valuation of nearly three times for this very small OPSB is a big surprise as some of its listed peers trade at a much lower valuation of mere 1 to 1.4 times their respective ABVs. In fact, the valuation of over Rs 2,300 crore for the entire 100% stake of CSB is about 10% of its total business size. As compared to this rich valuation, some of the listed OPSBs trade at a market cap, which is just around 4% of their business sizes. In terms of quality of asset also, most of the listed OPSBs score better – they have much lower net NPA (Non-performing assets) of less than 3% as compared to 4.73% reported by CSB. In terms of profitability also, most of the listed players in the OPSB segment have reported substantial profits as compared to a significant net loss reported by CSB in the first half of the current fiscal.

In the recent meltdown in the banking stocks, these OPSB stocks have fallen much lower – as compared to 25% to 30% fall in the stock prices of public sector banks (PSBs), most of the OPSB stocks have fallen around 15% since the beginning of 2018. These OPSBs have evolved from a very small base and continued to maintain their business size at much lower levels as compared to PSBs till recently. Hence, most of them were reluctant to go for big-ticket lending or credit guarantees. This has provided enough cushion to most of them during the turbulent times faced by the banking sector.

There are many listed old private sector banks which, are in existence over eight decades to more than a century. Some of them like Bank of Madura, Bank of Rajasthan, Vysya Bank, etc. already joined the consolidation process in the last two-and-half decades. Within the unlisted segment of OPSBs, earlier Lord Krishna Bank was acquired and now the acquisition of CSB is likely to complete. This would mean that in the OPSB segment as a whole, the opportunities for the M&A deals is getting narrowed down substantially. Hence, it is quite possible for M&A deals to get activated consequent to this CSB deal and therefore, a substantial re-rating of listed OPSBs is quite possible in the near future.

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