>BANKING SECTOR: Likely beneficiaries if consolidation happens (PRABHUDAS LILLADHER)

■ Consolidation among PSU banks to remain an unpredictable event: According to our observation, the inability of smaller and some mid-cap PSU banks to fund their growth by raising capital at attractive valuations and at regular intervals is among the primary reasons for the government to be seriously thinking about initiating the consolidation process. The government has been unsuccessful in the past and reasons are well known. However, this time it seems that the government is making some serious move to plan a roadmap for the consolidation process. However, we will prefer more assertive action from the largest shareholder for the consolidation to fructify over the medium term. Though the probability of consolidation in the Indian banking industry could be anybody’s guess, through this note, we attempt to analyze which banks will be in a better position to command a premium purely based on the current and savings account (CASA) per branch metric and regional presence.

■ Banks having dominant presence in Western India most likely to command a premium over others: Western India provides highest business opportunities and has the lowest allocation of branches at 15.6%, while Southern India has the highest at 28%. Again, Western India contributes 24.8%, Southern India 28.9% and Northern India 18.3% to India’s overall GDP growth. Due to this regional bias in the economic growth, we believe that banks having a dominant presence in these regions and states will be able to command a premium over its peers.

■ Our methodology focuses mainly on MCAP/CASA: MCAP/CASA ratio is not a standard valuation metric for banks. But our analysis clearly shows that for all listed PSU banks with similar efficiency parameters, this metric trade in a band.

■ Recommend a basket approach: We recommend investors interested in playing the consolidation theme to own a basket of mid and small sized banks. We prefer Bank of Maharashtra and Dena Bank in Western India, Oriental Bank of Commerce in Northern India, Indian Overseas Bank and Syndicate Bank in Southern India and Allahabad Bank which has a presence in Eastern and Central India. The selection is based on potential acquisition premium, regional presence and valuations.

To read the full report: BANKING SECTOR