M&M Fin, L&T Fin more likely to get bank license: Espirito

On the day when Reserve Bank of India issued clarifications on the new banking guidelines, Santosh Singh, banks & financials Analyst, Espirito Santo Securities believes that M&M Finance, L&T Finance, Bajaj Finance are more suited to receive new banking license. 

The central bank revised the validity period of in-principal approval for setting up of a bank to 18 months from the earlier 12 months. Singh believes that each and every company that wants a banking license will do restructuring in their portfolio, which may lead to mergers and demergers.   Singh also observed that RBI had kept too much power with itself for deciding on banking licenses. Referring to the criteria of past records and financial soundness under the new banking guidelines, Singh said that this criterion has given more power to RBI. Rather than being a lot transparent it has given far more discretion to RBI to reject or accept licenses. Below is the verbatim transcript of the interview Q: Bank licensing norms is 163 page document, so it is very difficult to go through, but what are your prima facie thoughts and in terms of a reaction stock specifically which one would you see maximum upside from in tomorrow's trade? A: There are two aspects to it. One is applying for the banking license, second is getting the banking license and third is whether it is viable for the new Non-Banking Financial Companies (NBFC) to become a bank and then there is something for the shareholders left out in it. If I look at the first two parts it is almost how it was around 2-3 months back. All the companies which were in contention earlier are in contention now also. If I look at the other part that if it is viable, sustainable and there is shareholder value creation and can be created or not. I have my own doubts which I have already mentioned in my earlier notes that it is easier to become a bank, but you will have to fulfill all the criteria and I do not think there is any dilution from RB's side in fulfilling those criteria’s. The upside is all dependent on how investors are looking at it tomorrow. It will be a very premature thing to say that there is an upside on this stock or the other one. Q: Which one do you think is the more likely candidate considering the strict criteria that the RBI is working with? A: We have our top picks on the banking side. We have also written that we like M&M Financials and L&T Finance. We also think that most of the companies fulfill the criteria’s but M&M Finance, L&T Finance, Bajaj Finance are the companies which at this juncture are more suited to the banking licenses. Q: From what you have heard of the fit and proper standards do you think the RBI has made things a little tougher by the answers it has given. It says that it will consider all business activities of the promoters, financial as well as non-financial when it applies the financial soundness and track record criteria. Will this be a nasty jar? A: The companies who want to become a bank will definitely do all sort of restructurings to fulfill RBI's criteria. So I do not think that this is going to be a problem. The real problem is going to be for shareholders of those companies which are going to apply for the licenses. Because of the demerger or merger it is bound to happen that some of the shareholders may not feel happy. I think each and every company that want a banking license will do restructuring in their portfolio. Q: My question is how do you measure financial soundness and successful track record? Those are the two conditions which are not been measured in quantitative and qualitative terms, not been elucidated by the RBI in quantitative and qualitative terms. The hope was that if we had had any bad behaviour in the past because of excise non-payment or because going foul with the US Food and Drugs Administration (USFDA), all these will not be an issue on the financial soundness of the company, because the financial services part has been run well. RBI has clearly said that anything that you have done in the past, all your business activities will have to face up to the criteria of financial soundness and successful track record. Do you see a lot of companies falling through the sieve because of this? A: RBI has kept a lot to itself. RBI has kept everything in their hands if they want to give a banking license to someone or not to give a banking license to someone. They have kept all these things qualitative. If you look at this criterion, it gives more power to RBI. So rather than being a lot transparent it has given far more things to RBI to reject or accept licenses.