Two midcap banking stocks have been on a roll; Centurion BoP on the news of its merger with Lord Krishna Bank merger, and IndusInd Bank, which might be looking at a foreign buyer.
Hemindra Hazari of Karvy Stock Broking believes that Lord Krishna Bank clearly has a very strong franchise in the state of Kerala. Hence the combined entity of Centurion Bank and Lord Krishna Bank would get a good franchise model, at least from the NRI side, particularly in deposits and remittances.
Vishal Goyal of Edelweiss Capital also echoes the same opinion. According to him, it is a very good deal in terms of geographical coverage.
On Indus Ind Bank, Hazari says that it could be some Western European bank which could take a stake in the bank.
Excerpts from CNBC-TV18's exclusive interview with Hemindra Hazari and Vishal Goyal:
How you have read the news of Centurion BoP's possible takeover of Lord Krishna Bank?
Hazari: Lord Krishna Bank clearly has a very strong franchise in the state of Kerala. Centurion Bank, had earlier taken over Bank of Punjab. Bank of Punjab also had very strong NRI business, particularly with the Punjabi community. So we would expect to see this bank getting a good franchise, at least from the NRI side, particularly in deposits and remittances.
Are you okay with the price that they are playing, which seems to be around the Rs 300 crore mark? Would that be a fair price and positive for Centurion shareholders?
Hazari: It would appear so but particularly when you go into some of these older private sector banks, which have had some issues, one hopes that due diligence has been done properly. And it is getting a clean balance sheet since that is the main concern in some of the bank mergers.
How have you read the news on Centurion BoP and Lord Krishna Bank; what's your call on the stock?
Goyal: I think it's fairly positive because Centurion is already present in the northern and western part of India. Now with this merger, they will get entry into southern business as well. Also it gives them the strong NRI remittance business with the help of Bank of Muscat.
I think they can definitely leverage those relationships there as well. So in terms of geographical coverage, it is a very good deal. In terms of valuations, I think due diligence needs to be done properly because small private sector banks, which are not very actively covered, can come up with some issue. We are positive on Centurion Bank's stock as well. We think with a small base, its inorganic growth strategy, it will continue to do well.
How do valuations look for Centurion Bank?
Goyal: At the current price, if it is trading at 2.9 times the book value, it looks slightly fair. They have been growing 15% QoQ and I expect 40-50% growth for them in the next 2-3 years. This, organically along with such inorganic steps like LKB merger or something else, which comes up in '09-08,
Post this merger, if I take a valuation for LKB of
around Rs 300 crore, then it will trade 2.6 times, which looks cheap to me. I think we are still expecting strong returns from here.
On the other hand, how do you read the news on IndusInd Bank because it is a 5% stake and marry that with the sort of numbers that they have reported in the quarter gone by?
Hazari: IndusInd Bank is clearly looking out for a foreign bank to take a 5% stake. The question is that if it will be a preferential allotment, then it would require RBI's permission. Now RBI has been very particular about allowing foreign bank's stake into private sector banks.
From a policy angle, there should not be an issue. But if it is a preferential issue, it would require RBI's clearance. And RBI tends to be quite strict in case of foreign banks. Having said that, if it is a secondary market issue, then I don't think there is any problem with that.
Q1 results of IndusInd Bank have been disappointing because the profits have been much lower. This is mainly on account of much lower securitisation business because they have stopped that business, which was there last year. They also have much lower bad debt recoveries this year.
Margins are also under pressure so I think this will be another year of consolidation for IndusInd Bank. This has been the case for IndusInd Bank since 1998.
Do you have any guesses on which global bank that could be? The management has stopped short of naming it and has told us that it is a bank from the developed world.
Hazari: This could be some Western European bank. IndusInd Bank had some diamond business earlier and they may still have it today. So it could be one of the foreign banks, which is into that kind of business.
Do you have any names in mind since you seem to have done some guesswork there?
Hazari: No, I would not really like to put out a name for this.
Which bank is into the diamond business?
Goyal: I am not really very sure of it.
IndusInd Bank is at about Rs 46, it's half its 52-week high. What would you do with it?
Goyal: I am not very gung-ho about the bank per se, simply because of the fact that their business fundamentals have only been showing weakness continuously.
Also, I think the quarter in which they showed some improvement on their CASA ratios or on their margins without securitisation, should be the quarter when we should start looking at the bank. Commercial vehicle financing is the core business for them, which became highly competitive in 2004-05 and their margins had collapsed there. There was no support from the cost of deposit side.
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