More of India’s smaller banks may become acquisition targets if the regulator gives a nod to the proposed merger of Lakshmi Vilas Bank Ltd. and Indiabulls Housing Finance Ltd., according to Credit Suisse Group AG analysts. If approved, the deal would be the first example of a non-bank financial company like Indiabulls Housing merging with a bank, following the 2016 relaxation of Reserve Bank of India rules. “This may be a catalyst for similar transactions with other small private banks, making them potential acquisition targets," the Credit Suisse analysts including Ashish Gupta wrote in a note on Monday.
Shares in Lakshmi Vilas and other smaller Indian banks rose on Monday after news of the proposed merger. South Indian Bank Ltd. gained as much as 6%, while Karur Vysya Bank Ltd. rose up to 4.8%.
Many of India’s non-bank financial companies have been suffering from a liquidity crunch since the shock defaults at shadow lender IL&FS group last year. Funding costs for the companies have risen to multi-year highs in recent weeks.
Using mergers to convert to a bank could become the "preferred route" for many non-banks to overhaul their business models and resolve their liquidity issues, the Credit Suisse analysts wrote.
Some of the country’s smaller banks trade at even cheaper valuations to Lakshmi Vilas, with Karnataka Bank on a price-to-book ratio of 0.71, according to data compiled by Bloomberg.
The proposed merger implies an 18% valuation of Lakshmi Vilas Bank’s deposit base, Credit Suisse said. Peers like South Indian Bank, Karnataka Bank Ltd. and Karur Vysya Bank trade at less than 10% of deposits, the analysts added.
Non-bank lenders "will need banks to survive ahead as liquidity is facing a big squeeze," said Sameer Kalra, president at Mumbai-based advisory Target Investing. Kalra sees DCB Bank and Karnataka Bank as "best potential" acquisition targets.
