Banking stocks in focus on ICICI-BoR deal

Stocks of a number of small and medium private sector banks surged during the past week amid hopes of increased merger and acquisition deals, triggered by the proposed takeover of Bank of Rajasthan by ICICI Bank.

During the week, shares of select banks like Karnataka Bank, Dhanalakshmi Bank, Federal Bank and IndusInd Bank outperformed the broader market and soared by up to 10 per cent against a fall of 3.23 per cent in the Sensex.

"There is enough scope for mergers and acquisitions in the small and medium banks, as the stock of these banks are fairly valued. One has to keep in mind that a major chunk of business comes from the rural sector of small banks, which may give a positive impact to the bank that acquires it," CNI Research chairman and managing director Kishor P Ostwal said.

The banks which outperformed the broader market index were Federal Bank (7 per cent), Lakshmi Vilas Bank (5), South Indian Bank (6.4), IndusInd Bank (3) and Karnataka Bank (10 per cent).
    
The 30-share index Sensex fell during the week by 548.99 points, or 3.23 per cent, to settle at 16,445.61 points.
    
The board of ICICI Bank gave in-principle approval to take over the troubled Bank of Rajasthan on May 18. Under the agreement, ICICI Bank will offer 25 shares for every 118 shares of BoR held by the Tayal family -- the promoters of BoR, which according to the market regulator Sebi holds 55 per cent equity in BoR.
    
During the week, shares of Bank of Rajasthan gained 74 per cent on the BSE to settle at Rs 144.40 at the end of Friday's trade. The BoR counter has been hitting the circuit breaker almost every day since the merger talks.
    
"This will definitely raise hopes for mergers and acquisitions in the banking space. The agreement between the BoR and ICICI Bank has also fuelled hopes of similar arrangements among the other peer group of banks," SMC Capital vice-president Rajesh Jain said.
    
"Investors, which are already holding the stock should hold it, while new investors should not buy the stock at higher levels speculating similar arrangements with other small and medium banks in the short-span," Jain added.
    
One of the largest domestic deals happened in early 2008, when HDFC Bank took over Centurion Bank of Punjab.
    
The country's largest public sector lender State Bank of India is also looking to takeover all six of its associate banks in due course. In 2008, SBI merged State Bank of Saurashtra with itself. The entity has also got approval to merge State Bank of Indore with itself.