South Indian Bank, a potential acquisition candidate: Angel

Angel Broking has come out with its report on "banking laws amendment bill". According to the research firm, the passage of amendments to the Banking Laws in the lower house of the parliament is expected to pave the way for issuance of the new bank licenses by the RBI.

The passage of amendments to the Banking Laws in the lower house of the parliament is expected to pave the way for issuance of the new bank licenses by the RBI. Amongst various other things, the bill offers vital powers to RBI, firstly to supervise group companies (i.e to oversee connected lending) and secondly to supersede the entire board and make changes that can last upto 12 months (in a way power to control banks in the event of non-compliance to necessary standards). Additionally, for Private banks the bill makes voting rights proportional to shareholding by removing existing cap of 10% (with a key restriction entailing the RBI approval for acquisition of 5% or more of a bank's paid-up capital) and for PSU banks, the cap on voting rights is raised from 1% to 10%. It allows PSU banks to use rights issues to access capital markets for raising capital.

As per our long held view, based on the discussion paper and draft guidelines for the issue of licenses, L&T (through L&T Finance) looks like the most eligible candidate amongst corporates who have evinced interest in getting a bank license, as it is not a promoter driven corporate and has the requisite financial strength and corporate stature to promote a bank, in our view. However, 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 3x L&T Finance Balance sheet and PAT). Likely entry of new banks in the banking industry would also increase the acquisition prospects of older private banks. Amongst the old private banks, we like South Indian Bank, both as a standalone investment and also as a potential acquisition candidate, keeping in mind current valuation parameters like P/ABV and Market cap/Branch.

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