Kotak-ING union takes some bank stocks to a high station

MUMBAI: Bank consolidation was the big market buzz on Friday, driving up the stocks of lenders seen as possible acquisition targets. Thursday's announcement that Kotak Mahindra BankBSE 3.68 % is to acquire ING Vysya BankBSE 0.32 % had a rub-off effect on Dalal Street with Federal Bank, Karnataka Bank, Dhanlaxmi BankBSE 2.31 %, City Union BankBSE 3.31 % and South Indian Bank rallying up to 6% in Friday trade.Investor sentiment has turned bullish on this space as more such deals are expected.
India's banks pale in comparison with those of China and the developed world and both the government and the central bank want mergers to create bigger banks. This may finally be ready to happen, if the Kotak-ING is a harbinger, analysts said. "Small banks would eventually have to get merged with the bigger ones. We believe consolidation in the banking business is a given at this point of time," said Sanjay Dutt, director at Quantum Securities. "Good quality, second-tier, semi-private sector banks make a lot of investment sense at this point of time. RBI has been nudging that smaller and weaker banks, which have good networks, need to ally with bigger ones," he added. Among the private sector banks that advanced on Friday, South Indian Bank rose 5.48% to Rs 27.90.
Karnataka Bank stock gained 5.07% on Friday to close at Rs 143.05 while Federal BankBSE 3.95 % rose 3.95% to Rs 147.50 and City Union Bank went up 3.31% to Rs 93.65. The Sensex rose 0.95% to 28,334.63 points and the Nifty was up 0.9% to 8,477.35—both setting new records.
"Kotak Mahindra Bank's merger with ING Vysya Bank has triggered a smart rally in select private banking stocks such as Federal Bank, Karnataka Bank and Yes Bank, which possibly could be the next merger candidates," said Amar Ambani, head of research at IIFL. To be sure, while Friday saw a definitive bump, investors have had their eye on these lenders for a while. In the derivatives markets, traders have placed bullish bets on Karnataka Bank as the stock has surged 18% over the last one month, with a 20% jump in open interest or outstanding contracts.
The stock on Friday witnessed the highest ever trading volume in the last five months with 2.62 crore shares being traded. Federal Bank surged to a record as some traders covered their short positions in the stock. "We have seen traders building fresh long positions on Federal Bank and Karnataka Bank in the derivatives segment, which they are betting to be the next takeover candidates in the banking space," said Chandan Taparia, derivatives and technical analyst at Anand Rathi Securities. "We expect Karnataka Bank to make a new rally once the stock crosses the Rs 150 level, while Federal Bank is expected to continue its surge."
Kotak Mahindra Bank has soared by about 20% over the last one month and ING Vysya Bank has rallied about 30% over this same period. City Union Bank has gained 98% over the last one year, while Federal Bank has rallied 90%, both outperforming the ET Bank Index, which gained 68%. Meanwhile, Lakshmi Vilas Bank, in which Cafe Coffee Day owner VG Siddarth has just purchased a 4% stake, and Karur Vysya Bank have gained about 65% in the past one year.
Traders have been encouraged by this kind of stock move in such a short duration and hence have been emboldened to place aggressive bets on some private sector banks, said analysts.