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July, 09th 2010

The Indian banking industry may see a few mergers and acquisitions (M&A) deals this year, ahead of the banking regulator releasing the licensing norms for new banks that are expected to open for business in the next two years.

At least three new generation private sector banks HDFC Bank Ltd, Kotak Mahindra Bank Ltd and IndusInd Bank Ltdhave set their eyes on acquisitions.

It is not known whether they have given a mandate to investment bankers for such acquisitions, but some dealmakers are independently reaching out to potential acquirers with suggestions on possible targets.

At least one foreign bank is recommending stocks of some south India-based old private banks to its high networth clients for investment because it feels that the market value of these banks will substantially go up once they are actively wooed by the new generation banks for possible acquisitions.

Addressing shareholders at HDFC Banks annual general meeting last week, managing director and chief executive officer Aditya Puri said he would look for a merger with a bank in the southern part of the country.

Kotak Mahindra Bank has already created a war chest for acquisitions by selling 4.5% stake in the bank for $296 million (around Rs1,400 crore today) to Sumitomo Mitsui Financial Group Inc. Its vice-chairman and managing director Uday Kotak has previously said that he is sniffing around for acquisitions.

Kotak recently conducted due diligence on CitiFinancial Consumer Finance India Ltd (CitiFinancial) that gives home and personal loans to retail borrowers in the low income segment, but the deal did not go through. It is now looking closely at a south India-based old bank, an executive at another bank said, asking not to be identified.

There have been talks in investment banking circles that IndusInd Bank, too, is actively looking at some proposals.

Its managing director and chief executive officer Romesh Sobti told Mint his bank is open to acquisitions as we now feel we have the financial muscle and required managerial skill to look at opportunities, but declined to divulge details.

An official of the Hinduja group, of which IndusInd Bank is a part, speaking on condition of anonymity said the bank has not appointed any investment banker as yet, but had received a proposal from one investment bank. We are open for inorganic growth options if we get the right opportunity at the right price, he added.

IndusInd Bank had acquired Ashok Leyland Finance Ltd, also part of the same group, in April 2003.

Investment bankers are closely tracking some old private banks, such as City Union Bank Ltd, Karnataka Bank Ltd, Federal Bank Ltd, Karur Vysya Bank Ltd, South Indian Bank Ltd and the unlisted Catholic Syrian Bank Ltd. These may or may not be available for acquisitions, but investment bankers are talking to most of them in their efforts to play the role of a matchmaker. Federal Bank is the most valuable among them with a market capitalization of close to Rs6,000 crore.

Once the new banks open for business, competition will intensify and many of these banks may find it difficult to grow; new generation private banks are aggressively looking at opportunities to expand their branch network and widening their presence pan India.

ICICI Bank Ltd, Indias largest private sector lender, is in the process of acquiring Bank of Rajasthan Ltd for its 463 branches. ICICI?Bank had earlier acquired Bank of Madura Ltd and Sangli Bank Ltd, again for their branches, and their presence in southern and western India, respectively.

HDFC Bank has acquired two banks in the pastTimes Bank Ltd and Centurion Bank of Punjab Ltd.

Most of the south-based private sector banks fit the bill in terms of providing scale and penetration, said the MD and CEO of a private sector bank, speaking on condition of anonymity as his bank is also looking for possible acquisitions.

His bank is not one of the three banks named in the beginning of this story.

However, analysts and consultants said the task will not be easy as many of these banks have a dispersed ownership and active trade unions.

The issue with some of the listed south-based banks is that they have a dispersed shareholding. In the presence of a dominant shareholder, negotiations becomes easier, but in cases where the holding is scattered, (getting) everybody on the (same) page becomes very difficult, said Bobby Parikh, managing partner of tax consultancy BMR and Associates.

Unionized employees, typically, oppose any merger for fear of losing their jobs, but in most cases despite their opposition, the mergers go through. The employees of the erstwhile Lord Krishna Bank Ltd had opposed its merger with Centurion Bank of Punjab and delayed it by a year, but could not stall it. After this merger, Centurion Bank of Punjab was acquired by HDFC Bank.

G. Chokkalingam, director and head (research and strategy) at Barclays Wealth India, said there are seven-eight listed old generation private sector banks, which have grown rapidly in the last six-seven years and they do not have any identifiable promoter.

The entity who gets the banking licence will take at least one-two years to set up shop. In anticipation, we can see some of the players acquiring strategic stake in some of these old private sector banks, he added.

Some of the companies that aspire to float banks already hold stakes in some old private banks. For instance, Larsen and Toubro Capital Holding Ltd holds 4.81% stake in City Union Bank and 4.68% in Federal Bank. Tata Capital Ltd holds 3.29% stake in Development Credit Bank Ltd and Reliance Capital Trustee Co. Ltd holds 1.14% stake in Dhanalakhmi Bank Ltd.

The latest acquisition in old private sector banking space (Bank of Rajasthan) has taken place at 5.5 times adjusted bookvalue. Whereas few high quality, fast growing banks in this space are available around two times their adjusted book value... We find this segment still quite attractive, said Chokkalingam.

Analysts find these banks an attractive proposition for potential buyers as their customer focus is largely on small and medium enterprises, which will drive asset growth in the future.

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