'Consistent performance' draws PE investment to older private banks

Private equity (PE) investments in older private sector banks in the country have started reviving. In 2011, this touched an all-time high of $200 million, the highest since 2007.

According to data compiled by Venture Intelligence, a research agency based here, which tracks mergers & acquisitions and PE deals, PE investors invested the amount mentioned earlier in 2011 across four deals, as compared with $9 mn across three deals in 2010, a substantial jump in terms of value.

The two major deals reported last year include $147 mn by Gaja Capital, Samara Capital, Norwest, Beacon India, Faering Capital, Cartica Capital and others in Ratnakar Bank, in January 2011.

K Ramakrishnan, executive director & head of investment banking at Spark Capital Advisors (I) Pvt Ltd, says the key things attracting investors include moderate valuation of the banks and management being separated from ownership — banks are now run by professionals. The business, valuation and exit are the three important causes for the jump in investment, he said.

On the business front, the older generation banks have been consistently performing well and their asset quality is also not a big issue, which attracts investors, he added. Agrees N Kamakodi, managing director and chief executive officer, City Union Bank (CUB), one of the country's oldest private sector ones. “If you look at the last 10 years’ data, the compounded annual growth rate of the old generation banks like us was better than public sector banks in all aspects.”

For instance, CUB's return on assets was a little over 1.5 per cent last year, comparable to the best in the industry. The return on equity is around 20 per cent and, in the last 10 years, the bank’s business growth in percentage terms has been four to five per cent higher than that of the rest of the industry.

According to him consistent performance, valuation and disclosure & transparency (considering banking is one of the most regulated sectors in the country) are key parameters, which attract investors, such as PE firms and foreign institutional investors (FIIs). 30 per cent of CUB is by FIIs, noted Kamakodi.