BOMBAY, 25 March — For the past few days, on the Indian bourses, banking stocks have been hogging a lot of limelight, giving returns of up to 100 percent to investors. And these bank stocks seem to be figuring out in almost all the mutual fund managers “buying” list too. So in this era of superlative growths by IT, communications and entertainment sectors, how come this conservative sector, of banking, has suddenly gained so much prominence? Over the past few weeks, there have been a lot of positive developments which have been reshaping the hitherto conservative Indian banking sector.
First and foremost was the decision taken by the Reserve Bank of India (RBI) allowing foreign direct investment (FDI) up to 49 percent in private sector banks.
The government control on public sector banks, including the State Bank of India, however, remains intact with the existing 20 percent cap staying unchanged. Thus, effectively the foreign stake in a private bank could go up to 98 percent. For the first time, foreign banks with a branch network in the country have been allowed to pick up equity in private banks.
The uptrend had led to listed private sector bank scrips recording gains ranging from 10 percent, to as high as 100 percent during the current month. Even shares of old private banks, which have been stagnant, are going through the roof. While the private sector banks like ICICI Bank, UTI Bank, Vysya Bank, Global Trust Bank and HDFC Bank have been gainers, the main newsmakers have been the old private banks like Federal Bank, Karur Vysya Bank, Karnataka Bank and South Indian Bank.
The old banks have caught on more fancy as the perception is that these banks with their huge branch networks and large customer base as much more easier targets for takeover by foreign banks, who are looking to expand their base in the country, especially in rural and semi urban areas. Following this announcement, the rumors mills in the Indian corporate world have been working over time. There is news that three foreign banks are studying the possibility of picking up an equity stake in Centurion Bank, while the promoters of Global Trust Bank are believed to have approached ABN Amro Bank, to sell more than 26 percent stake held by them in the bank. Also there is news that Vysya Bank is planning to join foreign banks in the race to take promoters’ stake in Centurion Bank (CBL), marking it as the first attempt by an old private sector bank to pick up stakes in a new-generation bank. This is a bit going against the trend as last year, ICICI Bank took over Bank of Madura, thereby becoming the first new-generation private bank to pick up an old bank.
There are also rumors of ICICI selling its over 20 percent equity stake in Federal Bank and South Indian Bank. Karnataka Bank and Karur Vysya Bank are rumored to be eyed by HDFC Bank. There are also reports of Indusind Bank and Bank of Punjab looking for strategic partners.
One “confirmed” news was , Bank Brussels Lambert, a subsidiary of the Dutch ING group, expressing its intent to take control of Vysya Bank in which it has a 20 percent stake. So with so many news floating around, is it any wonder then that there is so much interest generated in the Indian banking stocks.
This positive move of allowing 49 percent FDI in banks was soon followed up by RBI announcing liberalization of the norms for the issue and pricing of shares by private sector banks.
These banks — both listed and unlisted — will no longer be required to seek the central bank’s permission for raising capital, except for initial public offerings (IPOs) and preferential issues. The banks will be free to issue bonus and rights issues without RBI permission. The central bank has also delinked bonus issues from rights issues. The banks are also free to price their issues once the shares are listed through an IPO.
The central bank has always tried to ensure that the pricing is right and the issues are subscribed. Despite that, there have been cases where issues have bombed. For instance, there was no taker for the Centurion Bank rights issue. Once the banks are free to price the issues, the responsibility of making the issue a success will lie with these banks themselves.
Another major development taking place in the banking sector is the revival of bank initial public offerings (IPOs). Punjab National Bank (PNB) is serving out a Rs.1644.9 million public issue of equity shares of Rs.10 each for cash at a premium of Rs.21 per share (at an issue price of Rs.31 per share). Then there is news that an IPO is soon expected from Lord Krishna Bank. It recently successfully concluded its rights issue.
The issue was oversubscribed taking the net worth of the bank above Rs.1,000 million. There is no doubt that banking sector is currently “ hot property”. With the economy also showing signs of recovery and an era of low interest regimes, banks are expected to do well in the coming days. Keep a watch on the ripe “takeover” targets.