Foreign Buyout Reports, Repo Cut Prop Pvt Banks

Private sector banking stocks surged today on reports that foreign banks may acquire Indian private banks after the announcement in the Budget that they will be allowed to set up subsidiaries in the country. The surge was also fuelled by the cut in repo rates.

Shares of Federal Bank, South Indian Bank, Nedungadi Bank, Vysya bank and J&K Bank hit the upper circuit filters of 20 per cent during the day.

The Federal Bank stock closed at Rs 114.65, while South Indian Bank closed at its 52-week high of Rs 47.15. Nedungadi Bank ended at Rs 41.25, Vysya Bank hit a 52-week high of Rs 268 and ended slightly lower at Rs 248.25, J&K Bank hit a 52-week high of Rs 88 and closed lower at Rs 82.80, while Global Trust Bank closed 1 per cent higher at Rs 25.25 after hitting intra-day high of Rs. 27.20. IndusInd Bank closed up 11.74 per cent at Rs 16.65, Bank of Punjab ended up 6.35 per cent at Rs 15.90 and Centurion Bank rose 4.36 per cent at Rs 13.15.

"The banks that are being perceived as candidates for acquisition by foreign banks hit the upper circuit today and also breached new 52-week highs," a dealer said.

Reports suggest that leading foreign banks such as Citibank, HSBC, Standard Chartered Bank, ABN Amro Bank and ING are examining the possibility of operating in India through subsidiaries. The announcement in the Budget that foreign banks can float branches or subsidiaries in India has stirred up the current interest in local private sector banks. Expectations are that foreign banks adopting the subsidiary route may look at acquisition of stakes in existing private sector banks. Finance minister Yashwant Sinha had also said the 10 per cent voting rights restriction on foreign holding would be relaxed.

Expectations of stake acquisition by foreign banks have boosted scrips of Indian private sector banks in the last few weeks. For instance, Federal Bank soared 82 per cent from Rs 64.40 on February 13, 2002, to the current Rs 117.35. Centurion Bank has jumped 56.9 per cent in less than a month to Rs 13.50. Earlier, RBI had said in a clarification that 49 per cent FDI through the automatic route is allowed in private banks.

However, if foreign banks adopt the subsidiary route they will be required to adhere to requirements such as 40 per cent priority sector lending target and 25 per cent rural branch network target etc. The government is yet to issue detailed guidelines in this regard. For example, analysts say it is not clear whether subsidiaries that the foreign banks are allowed to set up can be 100 per cent subsidiaries.

Besides expectations of acquisitions by foreign banks, a cut in repo rate by RBI on Tuesday which signaled further cut in interest rates also boosted banking and financial sector stocks. RBI, on Tuesday, cut the rate of one-day repo auction under the liquidity adjustment facility (LAF) by 50 basis points to 6 per cent from 6.5 per cent, boosting the public sector bank stocks also.