Banking stocks are abuzz this week with buying interest much before the issue of new licences by the Reserve Bank of India (RBI) on signals that some may be ripe for takeover.
RBI governor Raghuram Rajan’s comments last weekend in the US that overseas banks may be able to acquire small Indian banks once the final licences are issued has triggered a rally in the shares of these small-and-mid-sized lenders. New licences are expected from January.
“It is going to be a big opening because one could even contemplate taking over Indian banks, small Indian banks and so on,” Rajan said in Washington.
While the share price of Federal Bank gained 2.2% in last two days to close at `334 on the BSE on Tuesday, South Indian Bank rose 4.4% to close at `21.The markets became optimistic about (small and medium) banking stocks after Rajan’s comments," said Saday Sinha, banking analyst, Kotak Securities. "The announcement from the RBI governor has resulted in movements in the share prices of small and private banks as that increases the possibility of consolidation," said Ankit Aggarwal, vice-president, fund management, Centrum Wealth Management.
Analysts, however, said these banks still have a long way to go before they become more attractive bets compared to bigger counterparts such as ICICI Bank and HDFC Bank.
“We believe that old private sector banks, which continue to maintain impressive asset quality in relative terms, have scope of outperformance over the span of next one year as valuations have corrected significantly,” said Aggarwal.
Though the consolidation in this space could lead to a re-rating of banks, experts advice caution before trading in these stocks. “I am cautious on the banking industry as a whole, as there is slowdown in the entire country,” said Sinha.
Analysts add that bank takeovers also need RBI approval, and nothing can be taken for granted.
Banks have also seen a surge in non-performing assets and a rise in corporate debt restructuring referrals in recent times, and the big ones are likely to fare better than their smaller peers due to higher current and savings account (CASA) ratio, say analysts, referring to low-cost deposits that lower their costs.