Bank of Rajasthan an expensive acquisition target, say Analysts

Tayals hold talks with banks, including ICICI & Axis Bank, on a possible buyout.

Jaipur-based Bank of Rajasthan (BoR) could prove to be an expensive acquisition target, given that its stock was trading at 2.5 times its 2009-10 book size and that its promoters were likely to demand a hefty premium to part with their stake, analysts said.

According to sources familiar with the development, BoR’s Chairman PK Tayal has held discussions with leading private sector banks such as ICICI Bank and Axis Bank for a possible buy-out. Foreign lender Société Générale is also believed to have shown interest.

However, wide differences over valuation could put a spanner in the talks. “There is a wide disparity between the valuations of the parties. Tayal is valuing the bank at more than twice its current market capitalisation,” said a person familiar with the development.

The bank’s current market capitalisation is Rs 1,253 crore. Tayal has not hired an investment banker for the prospective stake sale so far and is negotiating with the interested parties himself. When contacted, Tayal denied that he was in talks to sell his stake in the lender.

BoR’s stock fell 5.36 per cent on the Bombay Stock Exchange to close at Rs 84.75 on Thursday.

The promoters are embroiled in a regulatory storm and are under the scrutiny of both the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi).

Sebi has accused the promoters of misleading investors about the shareholding pattern of the bank.

In February, RBI had slapped a fine of Rs 25 lakh on the bank following a string of violations. It has also ordered a special audit of the books of the bank, after it found lapses in “corporate governance” and “disclosure norms”.

The news of the probable of acquisition has given wings to the stock. It has been a major outperformer, it notched up around 50 per cent in the last one month compared to flattish gains in the above period.

Business not so great
As the slowdown took hold in 2008-09, the bank’s advances declined as did net interest income (NII). From the lows in first quarter of 2010, NII is on the way up. However, what is discernible is the decline in the overall profitability in the last one year.

The growth rates in the net profits were on a decline ever since the second quarter 2009, chartered in the negative territory in the third quarter of 2009-10 (minus Rs 45 crore). The decline in the third quarter was primarily due to the fact that the bank provided around Rs 44 crore for wage revision. Even after that, it would have barely scraped through to the positive territory.

Besides, operating expenses have inched up in the first twelve months of calendar year 2009, while most other private sector banks were in cost-containment mode. Indicatively, the cost to income ratio worsened from 49 per cent in 2007-08 to 52 per cent in 2008-09 to more than 60 per cent in the recent quarter.

Good fit for ICICI Bank?
In terms of assets, ICICI Bank is around 25 times as large as BoR. In terms of branch network, BoR with 500 branches is around one fourth of ICICI’s network. A takeover would aid ICICI Bank in expanding its branch network. As most of BoR’s branch network is concentrated in northern India, ICICI Bank would gain deeper access to that part of the country. Asset deterioration for BoR is lower, however, ICICI had seen lower slippages in recent times. The recent data suggest that gross non-performing assets for ICICI Bank and BoR stood at 5 per cent and 2.8 per cent (as of December 2009).

However, the return on assets for ICICI Bank is much better. In terms of market capitalisation, ICICI would need to dilute around 1.5 per cent, which is a small dilution for ICICI. Overall, ICICI Bank might actively engage to take over Bank of Rajasthan. But the question is, at what price.

With BoR trading at around 2.5 times its 2009-10 book, it looks expensive for investors at this point of time. However, the stock would witness enhanced action if buy-out talks progress.