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An acquisition with a larger meaning?

By C. R. L. Narasimhan

HSBC's acquisition seems more a vote for the rejuvenated banking sector and less for any individual bank.

HSBC's acquisition of a 14.7 per cent stake in UTI Bank is significant in many ways. The multinational bank with a long presence in Asia (including 150 years in India) apparently took the market by surprise when it concluded the deal for about Rs. 306 crores. It has also reserved the right to acquire another 5.37 per cent from the vendor, CDC Capital Partners, who became famous with the Punjab Tractors deal. (Earlier this year the private equity fund took control of the state owned undertaking, becoming the first non-manufacturing entity to do so in the current privatisation wave). Besides, HSBC is complying with the existing regulation. Its open offer to acquire another 20 per cent from the other shareholders of UTI Bank has opened on Thursday. However, the rate of Rs. 90 is unlikely to be attractive given that the market price of UTI Bank share has zoomed well past the offer price.

HSBC's motives in concluding the deal, as spelt out by its senior officers, are purely investment oriented in nature. However, the acquiring bank is unlikely to remain as a mere investor. There is already a talk of seeking a board level appointment and reaping other synergies between the two banks.

UTI Bank with more than 200 branches and extension counters and around 1000 ATMs will automatically fit into any strategy of penetrating the retail banking business, now the favoured choice for almost all banks. HSBC for all its historical association with India has just 34 banks and like the other foreign banks with a British tradition has been considered to be a niche player.

The foreign bank's moves to expand its presence in India are possible only because of the changed regulatory regime. Foreign banks are now permitted to start a subsidiary with majority stake. Very relevant to the HSBC-UTI Bank deal, they can also invest up to 49 per cent under the foreign direct investment (FDI) route. There is however less clarity on what the total level of foreign shareholdings (FDI and FIIs put together) in Indian banks should be.

Another dampener for anyone acquiring a sizable stake in an Indian bank is that at present voting rights are capped at 10 per cent of the shareholding. Despite all these hurdles, the UTI Bank stake was perhaps the best possible buy for the foreign bank. At Rs. 90 the acquisition price is nine times the annualised first half year earnings of the UTI Bank and under 2.5 times the book value.

Given that acquiring a stake in a public sector bank (the category which still controls more than 80 per cent of the Indian banking business) is impossible now, it is the private banks that present an opportunity.

The deal with the Dutch financial group ING concluded with the old-generation private bank, Vysya Bank, is 18 months old. UTI Bank is a new generation private bank. In that category of banks licensed in the reform era, the bank has not exactly been a star performer.

Only HDFC Bank and ICICI Bank can claim those honours. However, after a failed merger attempt with the GTB (a bruising experience with another new generation bank) its recent performance vindicates the Government strategy of providing completion in the banking sector through new well capitalised, technology savvy banks. While there have already been a spate of mergers and shakeouts in the private banks category. It is very likely that the HSBC deal will be trend setting in a few critical ways. It might well be the route foreign banks will take either to consolidate their presence or gain entry for the first time.

Of the other new private banks Centurion Bank is just about to admit new shareholders — Sabre Capital, Bank Muscat and Keppel of Singapore — which might well turn out to be its saviours. Another bank with a lacklustre performance record, Bank of Punjab, is among the likely targets if reports are any indication. And GTB might also be forced to seek a suitor, Indian or foreign with the latter appearing more probable.

It might be hasty to conclude but the HSBC acquisition seems more a vote for the rejuvenated Indian banking sector and less for any individual bank. How well the foreign bank fits its acquisition into its overall strategy of growing in India will depend equally on the other shareholders of UTI Bank. At present, UTI holds a little over a third of the bank's stake and LIC and GIC hold 13.50 per cent and 7.39 per cent respectively.

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