The RBI is likely to issue new bank licence soon. The key question before investors is whether or not to buy the new bank licensees over the existing and well established franchises such as HDFC Bank & Axis Bank. Our fundamental & quantitative analysis shows that significant value could accrue to investors from new bank licensees with a well-executed strategy.
Empirical evidence shows that new bank licensees have potential to deliver high returns during the early phase of growth. Average Total Shareholder Return – TSR [Stock Appreciation + Dividends + Bonus] of seven new bank licensees issued during 1994 and 2002 was 40% during the first 10 years of their growth. The exception to the above was IndusInd Bank (IIB), which returned far higher shareholder returns.
Although significant opportunity exists for creating value through bank licensees, only five out of the nine new licenses issued in 1994 survived. The remainder merged with surviving banks due to insolvency or inability to commit more capital for growth. However, licenses issued in 2003 had 100% survival rate. Times Bank sold itself to HDFC Bank in 2000. Centurion Bank and Bank of Punjab Merged together in 2005 and subsequently HDFc Bank bought the merged entity in 2008. Global Trust Bank went out of Business with ZERO Shareholder Value and Oriental Bank of Commerce acquired the same.
After two decades of financial sector liberalization and reforms, PSU Banks still dominate the sector with 77% and 76% market share in loans and deposits as at end FY13.
Those NBFCs (Bajaj Finance, IDFC, LIC Housing Finance) now seeking a bank licence see bank operating structure as an opportunity to strengthen their liability franchise and achieve higher economies of scale in their businesses. Access to retail funding sources is essential to strengthen the liability franchise.
We would buy Bajaj Finance for its potential to deliver highest shareholder return, followed by LIC Housing Finance.
Bajaj Finance if Allotted a Banking License will have the shortest payback period. Net profit level of the company after its conversion into bank is likely to be restored to level forecast to be achieved within two years of commencing the banking operation.
LIC Housing Finance is also expected to report a payback period with quicker—net profit level likely to be restored to pre-conversion level within three years of commencing banking operation. LICHF has a key advantage over many other banking aspirants; it would be able to meet the priority sector lending targets from its existing loan book and hence unlikely to forego profits while meeting the statutory requirement.
IDFC is likely to face an uphill task after conversion into a bank because of large asset base requiring augmentation of significant amount of resources from the deposit market to comply with statutory requirements, lack of competitive edge in lending activity other than project / term loan financing.
Do Not BUY in one Go. Accumulate the Stocks on Correction as it will be a Long Term Play and look for this space on if they’ll really get the license as RBI is keeping our anxiety levels high holding the announcement.