Lakshmi Vilas IndiaBulls Merger: Rerating for small private banks

04/07/2019

Lakshmi Vilas IndiaBulls Merger: Re Rating for small private banks

On Friday, the merger of Lakshmi Vilas Bank (LVB) with Indiabulls Housing Finance (IBHF) was announced. The private sector bank has around 569 branches across India with a good network in South India. The merger would help Indiabulls Housing Finance fulfill its banking aspirations. IBHF had earlier applied for a banking license in 2013 which got rejected. But this merger would prove highly beneficial for the company in the long run as the cost of raising funds would substantially reduce. Even, LVB has been posting losses for the past 5 quarters and was in need of some capitalization. Hence, this merger is a perfect case of NBFC and Banking symbiosis.

But, apart from the merged entities, it seems like various other struggling small private banks can benefit from this as well. Karnataka Bank, South Indian Bank, Karur Vyasya Bank, Dhanalakshmi Bank are some names which might see re-rating in the stock market and give handsome returns in coming times. Let’s do a quick comparison of the valuation of LVB with these other banks.

Quick Comparison

LVB was trading at 92.8 INR which is approximately 1.33 times its book value. The bank has been posting losses from the past 5 quarters and struggling to keep NPAs in check. Lets see how the other banks fare on these parameters. Karnataka, Karur Vysya and South Indian Bank fare much better than LVB in profitability and have been posting profits regularly. Even Dhanalakshmi Bank which was earlier into losses posted modest profits in last two quarters. In terms of profitability, LVB is lagging behind its peers.

Private Bank ReratingPrivate Bank Rerating

The charts above show the valuation (Price to book value) and NPAs of the banks reported in Q3, 2018. Lakshmi Vilas Bank had the highest gross and net NPA in Q3, 2018. Despite of the low profitability and higher NPAs, LVB has a higher price to book value ratio compared to all the others.

Possible Rerating

After the merger of LVB with IBHFL, there are chances that the better quality peers can catch up with it in valuations. Of all the banks we discussed, Karnataka and South Indian Bank have been more consistent in profitability and have the least NPAs. Also, both trade at very cheap valuations compared to LVB. Therefore, re-rating can be on the cards for both these banks and can fetch handsome returns in coming times.

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Disclaimer: I am not a SEBI registered analyst and not advising anyone to buy. The purpose of this article is to share my viewpoint about fundamentals and the future prospects of the company. So, please do not consider this as an investment tip. Talk to your financial advisor before taking any investing call.

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