In its recently released report, the RBIÊ¹s Internal Working Group (IWG) has proposed several recommendations to harmonise the ownership guidelines, regulatory landscape, and corporate microstructure of Indian private banks. The recommendations have clear implications for the banking sector and select banking/NBFC stocks. Let’s find out.
The IWG has recommended that the cap on promotersâ€™ stake in the long run (15 years) may be raised from the current level of 15% to 26% of paid-up voting equity share capital of the bank. If this gets implemented it would bring criteria for other banks at par with Kotak Mahindra Bank that was given an exception. In fact, this recommendation is a positive move toward being â€˜fair to allâ€™ after allowing Mr. Uday Kotak to maintain up to 26% stake in his bank.
This would be positive for IndusInd Bank as the promoter (Hinduja Group) was looking to increase stake (14.7% currently) but was unable to due to regulation while the bank was also in need of capital. Hence, this move addresses both concerns for IndusInd, says analyst Kajal Gandhi of ICICI Securities.
DCB Bank, whose promoter has already expressed interest in increasing their stake, will stand to benefit from such a policy change, as per HDFC Securities.
New small-finance banks like Equitas and Ujjivan, which otherwise had to go for a significant promoter stake dilution, will be beneficiaries if RBI accepts the IWG recommendations in toto.
Do note that some experts believe that voting rights will still be restricted to 15%, and this may come as a dampener unless clarified.
With regards to the recommendation on on-promoter shareholding cap being raised from 10% to 15%, one can expect large cap, well-run banking stocks to be the frontline beneficiaries.
NBFC to banks?
A key recommendation is that well run large non-banking finance companies (NBFCs), with an asset size of Rs 50,000 crore and above, including those which are owned by a corporate house, may be considered for conversion into banks subject to completion of 10 years of operations and other criteria.
This will allow large NBFCs who are willing to go for banking licence and have the desired criteria. Many believe this would be a positive for companies like Bajaj Finance, M&M Finance, Shriram Transport and L&T Finance who can apply for the banking licence if the opportunity materialises. But, there is another side as well.
“(Bajaj Finance) management had also mentioned that consideration of a banking license was after the company becomes 3x its current size. We believe BAF will continue to be a growth story and management would not transform into a bank at the cost of growth at least over the medium term,” says Jignesh Shial, research analyst, Emkay Global Financial Services.
Also, keep an eye on conglomerates such as AB Capital due to their diversified loan book.
Many of the large industrial houses which already have a payments bank (Airtel Payments Bank, Jio Payments Bank, PayTM Payments Bank, etc) could apply for a Small Finance Bank (SFB) license, thereby disrupting the current SFB incumbents, says Raghav Garg of Nirmal Bang Institutional Equities.
Banks licensed before 2013 may move to an NOFHC (Non-Operative Financial Holding Company) structure at their discretion. Once the NOFHC structure attains a tax-neutral status, all banks licensed before 2013 shall move to the NOFHC structure within five years from announcement of tax-neutrality.
According to Gandhi, this implementation may not be so straightforward and immediate as the NOFHC structure to attain tax neutrality would require amendments in the Income Tax Act. However, if implemented, banks like SBI, Kotak Mahindra, etc, would have to move into this structure as they have other businesses like insurance, AMC, securities, etc. Fortunately, there is no immediate impact for SBI, Kotak Mahindra, Axis Bank.
Do note that if banks — currently under NOFHC structure — are allowed to exit such a structure if they do not have other group entities in their fold, then there will be some beneficiaries. If implemented, this will be a positive for Equitas SFB, AU SFB, Ujjivan SFB and Bandhan Bank as they can roll the bank into a single entity and can get away with the so-called holding company discount in markets!
Exiting a holding company structure also removes a key overhang to reduce promoter stake to 40% within five years of the commencement of banking operations in both Equitas and Ujjivan, says Motilal Oswal analyst Nitin Aggarwal.
IDFC Ltd can also benefit if the AMC business is sold off.
Too many banks?
Set against banking background, the IWGâ€™s report indeed builds a strong case for increasing the role and number of private banks to further economic development.
Contrary to the opinion of experts, the IWG has recommended allowing large corporate houses to set up banks. “Despite the RBIÊ¹s fresh attempt at welcoming industrial houses to apply for a banking license, we remain relatively sceptical of this route playing out meaningfully in the nearâ€term,” says HDFC Securities. Take a cue from unsuccessful / withdrawn applications under the 2013 edition.
For large corporate houses looking to enter the space, acquisition may be a more attractive route and a few midâ€tier banks serve as interesting potential targets.