Talks to sell a majority stake in two Indian banks have attracted interest from foreign peers in Japan and the Middle East betting on the fast-growing economy, but strict regulations and concerns about the price can curb appetite, analysts and sources said.
A rare opportunity for foreign banks to gain a controlling stake in a market dominated by state-owned banks comes as existing investors in Yes Bank and IDBI Bank seek ownership.
Banking sector deals in India, especially those involving foreign entities, are rare. The full takeover of troubled Indian lender Lakshmi Vilas Bank by Singapore-based DBS Group in a regulatory-driven transaction in 2020 is the last major deal.
The top shareholders want to exit the two banks about four years after they were tied up by regulators and the government to help them recover from deteriorating asset quality as excessive loans threaten stability.
Private sector lender Ya Bank, in which shareholders want to sell a 51% stake, has attracted interest from Japan’s Sumitomo Mitsui Banking Corp (SMBC) and Emirates NBD, Reuters reported.
IDBI Bank, in which the Indian government and Life Insurance Company jointly sold a 60.72% stake, has seen Emirates, Canada’s Fairfax Group, as well as local rival Kotak Mahindra Bank express interest.
Foreign interest in the two banks comes as India’s economy is forecast to grow at 7.2% this year, making it one of the fastest growing major economies in the world.
Demand for bank credit, which includes corporate loans and mortgages, is growing at twice the rate of expected economic growth and bad loans in the domestic banking sector are currently at a record low of 2.8% of total assets.
Like other major markets, incoming banking sector transactions are closely scrutinized in India. Given the importance of the sector and its ties to the wider economy, New Delhi is expected to attract interest from bidders in countries with good political ties, analysts said.
“India’s growth story is promising, and companies want to expand their business,” said Ashvin Parekh, managing director of Ashvin Parekh Advisory Services, which provides services to investors in banks. “This is amazing for these (foreign) players,” said Mr. Parekh.
Despite their attraction, strict rules related to capital requirements and ownership limits, and the dominance of the state with government-backed banks accounting for nearly 52% of bank credit has weighed in the operation of foreign banks in India.
Regulations in India also require that the largest shareholder of a local bank, called a ‘promoter’ under Indian regulations, must reduce its shareholding to 26% over a 15-year period.
Foreign lenders, including HSBC and Standard Chartered, accounted for just 3.4% of banking sector credit in March 2024, less than half of the 8.4% share they held in March 2000, according to central bank data.
‘Fierce Rivalry’
SMBC has been in advanced talks with Yes Bank and lead investor State Bank of India in the past few weeks for the acquisition of a majority stake, said three sources with knowledge of the talks.
The core banking unit of Japan’s No.2 banking group Sumitomo Mitsui Financial Group has sought Yes Bank’s operational data and its executives have met with officials at the Reserve Bank of India (RBI), the central bank, the sources said. Yes Bank was rescued by a consortium of local banks in 2020 after bad loans increased.
Emirates NBD is also in talks for a stake in Yes Bank. It is also involved in the process of selling shares to IDBI Bank, said one of the top three sources and a fifth person familiar with the negotiations in India.
The government plans to invite financial bids for IDBI Bank by the end of this financial year, divestment secretary Tuhin Kanta Pandey told Reuters last month. IDBI Bank was bailed out by the government in 2019. The RBI has approved Fairfax Financial, Emirates NBD, and Kotak Mahindra as potential bidders, Reuters reported earlier this month.
The sources could not be identified because the talks were private.
Yes Bank and Kotak Mahindra did not comment on the deal talks. SMBC declined to comment. The RBI, IDBI Bank, Emirates NBD, and Fairfax did not respond to a Reuters email seeking comment.
High value?
However, some potential bidders are expected to baulk at the high valuation of the target, analysts said, clouding the prospect of the bid being closed. It was not immediately clear how long the two deals would take to complete.
Yes Bank is currently valued at $10 billion, and trades at 1.58 times its forward 12-month price-to-book value, according to LSEG, compared to the sector’s price-to-book average of 1.45 times. IDBI Bank is trading at a 12-month price-to-book value of 1.97 times, LSEG data shows.
The “legacy” of asset quality problems at both banks will also make acquisitions more expensive for foreign buyers, independent research analyst Hemindra Hazari said.
“It’s a real problem, but the Indian banking system is very competitive,” Mr Parekh said. “Foreign players need a significant network of branches, distribution and franchises to support the banking system.”
