Will you buy these two midcap banking stocks?

Hemindra Hazari of Karvy Stock Broking believes that Lord Krishna Bank clearly has a very strong franchise in the state of Kerala. Hence the combined entity of Centurion Bank and Lord Krishna Bank would get a good franchise model, at least from the NRI side, particularly in deposits and remittances.

Vishal Goyal of Edelweiss Capital also echoes the same opinion. According to him, it is a very good deal in terms of geographical coverage.

On Indus Ind Bank, Hazari says that it could be some Western European bank which could take a stake in the bank.

Excerpts from CNBC - TV18’s exclusive interview with Hemindra Hazari and Vishal Goyal:

Q: How you have read the news of Centurion BoP 's possible takeover of Lord Krishna Bank ?

Hazari: Lord Krishna Bank clearly has a very strong franchise in the state of Kerala. Centurion Bank, had earlier taken over Bank of Punjab. Bank of Punjab also had very strong NRI business, particularly with the Punjabi community. So we would expect to see this bank getting a good franchise, at least from the NRI side, particularly in deposits and remittances.

Q: Are you okay with the price that they are playing, which seems to be around the Rs 300 crore mark? Would that be a fair price and positive for Centurion shareholders?

Hazari: It would appear so but particularly when you go into some of these older private sector banks, which have had some issues, one hopes that due diligence has been done properly. And it is getting a clean balance sheet since that is the main concern in some of the bank mergers.

Q: How have you read the news on Centurion BoP and Lord Krishna Bank; what’s your call on the stock?

Goyal: I think it’s fairly positive because Centurion is already present in the northern and western part of India. Now with this merger, they will get entry into southern business as well. Also it gives them the strong NRI remittance business with the help of Bank of Muscat.

I think they can definitely leverage those relationships there as well. So in terms of geographical coverage, it is a very good deal. In terms of valuations, I think due diligence needs to be done properly because small private sector banks, which are not very actively covered, can come up with some issue. We are positive on Centurion Bank's stock as well. We think with a small base, its inorganic growth strategy, it will continue to do well.

Q: How do valuations look for Centurion Bank?

Goyal: At the current price, if it is trading at 2.9 times the book value, it looks slightly fair. They have been growing 15% QoQ and I expect 40-50% growth for them in the next 2-3 years. This, organically along with such inorganic steps like LKB merger or something else, which comes up in ’09-08, I think the valuations are still cheap. Post this merger, if I take a valuation for LKB of around Rs 300 crore, then it will trade 2.6 times, which looks cheap to me. I think we are still expecting strong returns from here.

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