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Feb 26, 2013, 04.40 PM IST | Source: Moneycontrol.com

New banking license norms would be a game changer: Angel

Angel Broking has come out with its report on new bank licensing norms. The research firm says as prima facie criteria suggest that six to eight very serious corporates, with deep-pockets are likely to get a banking license.

Angel Broking has come out with its report on new bank licensing norms. The research firm says as prima facie criteria suggest that six to eight very serious corporates, with deep-pockets are likely to get a banking license.

How many licenses are likely? 6-8 in our view: The final new bank licensing norms, in our view, are potentially game-changing for the banking sector, as prima facie criteria suggest that six to eight very serious corporates, with deep-pockets (far more than was earlier being anticipated), are likely to get a banking license. As per final guidelines, corporates where promoter-shareholding is less than 49percent could effectively qualify - a more relaxed norm than earlier expected.

Hence, with some structuring, amongst the large corporates that have evinced interest, Reliance Industries (RIL), Larsen and Toubro (L&T), Mahindra & Mahindra (M&M), Tata Group, Birla group and Bajaj as well as Shriram group amongst NBFCs could likely qualify. PSU companies by definition have 51percent+ promoter holding, so they may not qualify. Similarly, real estate and broking firms may be considered as being exposed to asset price volatility and hence may implicitly not qualify.

Competition in the sector could increase significantly: The guidelines stipulate that the holding company (ie promoter) shareholding will have to be brought down to 40percent within 3 years. This could have far-reaching implications regarding the competitive dynamics. The key question is how much equity capital these large corporates would aim to start with. In our view it is unlikely that given the ambitions, massive size and indicative ticket sizes for past diversifications, any of the major corporates would want to start with too small a fresh investment of say, just Rs500-1,000cr.

Implications for existing banks: Currently, few private banks are earning RoEs well in excess of 20percent in spite of a GDP down-cycle, reflective of the high pricing power enjoyed by the sector inherently. In our view, given the overall increase in competitive intensity, the major implication of new bank licenses is that the sector’s margins and ROEs are likely to decline, including those of existing private banks. We expected PSU banks to lose market share in any case due to capital shortage for them under Basel 3. Now, with new entrants bringing incremental capital as well, the market share loss is likely to get accelerated further. Due to cyclical macro-economic concerns, PSU banks are already trading at depressed valuations. This development creates a structural impediment to medium-term re-rating as well.

In case of existing large private banks, we preferred Axis Bank and ICICI Bank due to their favorable cyclical and structural outlook. But, in light of higher number of likely new entrants over the next few years, whether the larger private banks can sustain 25percent+ earnings growth remains to be seen. Considering that the larger private banks still have just about 5percent market share each, in our view they can still grow at least at sector growth levels of 17-18percent and possibly a little higher. But with the risk of higher competitive intensity, we would expect relatively more moderate upsides than earlier. Similarly, for newer private banks like Kotak Mahindra Bank (not rated), Indusind Bank (not rated) and Yes Bank , challenges of ramping up a retail franchise are likely to materially increase and could impact valuation premiums.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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