Is This A Loss For A Gain?

01 Dec,2012 07:44 IST

Is This A Loss For A Gain?

Speculation is rife over why L&T Finance offloaded its stake in Federal Bank

Srikanth Srinivas


L&T Finance Holdings’ sale of its 4.67 per cent stake in Federal Bank surprised a lot of people, though no one was clear exactly why. A commonly held theory was that L&T Finance — which would like to get one of the new bank licenses as and when they become available — may have made an open offer to buy enough of a stake in the so-called ‘old’ private sector bank instead of launching a greenfield venture if it got a license. 
But L&T Finance also owns 4.67 per cent in City Union Bank, another old private sector bank; now, analysts suggest that the financial services firm still has an alternative. “Comparatively, Federal Bank would have been an expensive option,” says a senior analyst with one of the largest securities firms in the country on condition of anonymity.
Industry experts agree that L&T Finance is expanding fairly aggressively, hiring talent and expanding business lines through buyouts, like recent ones in auto finance and housing finance. “They will need a sort of war chest, and this sale (of Federal Bank shares) could well be a way of adding to it,” says A.K. Prabhakar, senior vice-president for equity research at Anand Rathi Financial Services.
4.67 per cent is the stake offloaded by L&T

But does City Union Bank have any imperative to sell? It’s fairly robust, with a balance sheet of Rs 18,351 crore in March this year, and a 311-branch network; the bank’s management is clear about retaining its independence, so it could well be a reluctant candidate.
“Unless the bank is under regulatory pressure to shed that identity, any takeover attempt is unlikely to be mounted,” says A.S.V. Krishnan, senior analyst at Ambit Capital. Prabhakar points out that there are a number of other potential candidates — Dhanalaxmi Bank or Karnataka Bank come to mind — should L&T Finance want to take that route.
Now that Parliament is in session again, most analysts expect the Banking Regulation Act (Amendment) Bill to be tabled and voted upon; finance minister P. Chidambaram recently suggested that the Reserve Bank of India (RBI) will be ready with the final guidelines for new bank licences. So expect some further movement on the new bank licenses.
L&T Finance’s stake in Federal Bank came from its ownership of L&T Capital, then an L&T subsidiary that held the original Federal Bank shares for nearly five years; owning that kind of stake allows a finance company to get access to a lot of the mid-sized corporate clients, and send to the banks the retail customers it gets for auto and finance loans. 
“L&T Finance has used the opportunity to learn the retail financial services business well,” say the head of research of another leading firm, also on condition of anonymity. “It’s been reported that L&T Finance is a potential buyer of the Future Group’s stake in Future Generali’s general insurance business; L&T Finance itself sells both general and life insurance products. So some analysts believe   that the money from the sale of the Federal Bank stake could be used to buy the Future Group stake in its joint venture with Generali Insurance. It’s all about the footprint: the bigger, the better. 

(This story was published in Businessworld Issue Dated 10-12-2012)


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