Frenzy in finance shares continues; Bajaj Fin +6%

Moneycontrol Bureau

Investors continue to pile on to shares of non-banking finance companies most likely to get a banking license, and private banks that appear to be potential acquisition target.

Bajaj Finance is up 6%, and shares of L&T Finance, M&M Financial Services and Shriram Transport Finance are up between 1-3% on an average. In the banking space, Karnataka Bank, Federal Bank, Dhanlaxmi Bank, City Union Bank and South Indian Bank are up between 1-3%.

Shares of bank aspirants have had a good run over the 4-6 weeks, and quite a few of them, if not all, are fully valued at these levels, say analysts.

Some like L&T Finance are already struggling to build on recent gains, indicating few takers at higher levels.

“Post the sharp run-up, we believe L&T Finance stock is very expensively priced (to put it in perspective, its market cap is similar to an existing new generation private bank, which is also growing rapidly and has 3 times L&T Finance balance sheet and profit after tax),” says a note by Angel Broking.

That is a view shared by Nischint Chawathe, financial analyst at Kotak Institutional Equities, who feels the stock is quoting above its fair value.

A section of the market is betting that the new entrants in the banking space may look to acquire some of the older private banks

"Likely entry of new banks in the banking industry would also increase the acquisition prospects of older private banks," write Vaibhav Agrawal and Sourabh Taparia of Angel Broking, with South Indian Bank being their top pick.

Bank of America Merrill too is betting on this trend.

"We think there is a high possibility that many of the new banks could consider acquiring older smaller banks with large distribution networks, such as Karnataka Bank, Federal Bank, etc., especially given that they may need to have at least 25% of their branches in unbanked areas. The key would be managing the fragmented ownership of many of these banks," says the Merrill note.

Chawathe of Kotak however feels M&A activity will not be the priority of new banking entrants, who will first have to show a strong business model to the RBI to be eligible for the banking license.