The acquisition of Bank of Rajasthan (BoR) by ICICI Bank may lead to a relook at the valuations of other small private sector banks.
On Thursday, the stock prices of private sector banks such as Karnataka Bank, South Indian Bank and Federal Bank were up 2-5 per cent.
More significantly, on Wednesday, while the BSE Sensex tanked over 400 points, these stocks were up. The price being paid for Bank of Rajasthan has increased investor interest in other banking stocks as well.
The stock price of Bank of Rajasthan has been shooting up since the details of the transaction with ICICI were announced. BoR stocks has risen by 20 per cent each in two sessions and 10 per cent in one session.
ICICI is offering 25 of its own shares for every 118 shares of Bank of Rajasthan. Based on Thursday’s closing price, ICICI is valuing BoR at Rs 176/share — almost twice the pre-deal price. This broadly works out to Rs 5.6 crore for every branch of BoR.
Based on the market capitalisation to branch ratio that ICICI is using, other private sector banks such as South Indian Bank, Karnataka Bank and Federal Bank may see a re-rating, says Emkay, a research house.
That’s because ICICI is valuing BoR at Rs 5.5 crore/branch — while comparable figures for South Indian Bank and Karnataka Bank are Rs 3 crore and Rs 4.5 crore respectively.
Meanwhile, ICICI Bank saw its stock price tank on Wednesday, after the merger announcement — the price being paid for BoR is being seen as being too high.
However, most analysts seem to feel that the deal is favourable — because of the new branches that ICICI will get. ICICI currently has over 2,000 branches and will get another 463 from the merger.
“In our view, the main benefit of the merger for ICICI Bank is BOR’s branch network, concentrated in northern states like Rajasthan (60 per cent of total branch network), Punjab, Haryana and Delhi,” says Angel Broking in a note.