The Reserve Bank of India’s decision to allow foreign banks to acquire Indian banks may lead to a wave of mergers and acquisitions (M&As) in the banking industry.
The likely targets: small and mid-size banks such as Development Credit Bank, Karnataka Bank, City Union Bank, Lakshmi Vilas Bank and Dhanlaxmi Bank. The result: shares of small and mid-size lenders rallied up to 8% on the Bombay Stock Exchange (BSE) on Thursday. RBI had announced its decision late on Wednesday.
“Foreign banks which want to grow in India will look at acquiring Indian banks,” said Monish Shah, senior director, Deloitte India.
Earlier, foreign banks faced severe policy restrictions on expansion in India. Forty three foreign banks operated a network of 333 branches at the end of March 2013.
On average, RBI has allowed these 43 foreign banks to open a (combined) total of 12-15 new branches every year.
But the new rules will allow foreign banks to compete on almost an equal footing with their Indian counterparts and make it easier for them to expand their branch networks as part of an attempt by RBI governor Raghuram Rajan to increase competition in the banking sector.
Savvy investors have begun buying shares in these banks in anticipation of foreign banks launching takeover bids, which will give them a readymade branch network and customer base.
Shares of these banks jumped 2-8% in morning trade on BSE but more significantly, trading volumes jumped by up to 300%, indicating large scale buying in these counters.
These shares fell back to near their opening levels when the broader market fell late in the day following rating agency S&P’s warning on a possible ratings downgrade for India.
Though experts declined to set target prices, they were unanimous that shares of these banks are likely to appreciate significantly over the next few months.
“Every private bank is now a possible acquisition target,” said Vaibhav Agrawal, banking analyst, Angel Broking.
“Along with the existing foreign banks, new players planning to enter India will also be interested in acquiring banks as it will give them quick start,” said a banking analyst with broking firm.