M&M-RBL Bank deal: A long-term strategic investment, with hopes of a regulatory re-think?

Bankers suggest the deal is completely strategic and indicate that RBL Bank's potential for growth is intact over the long term

By Salil Panchal Forbes India Staff

Published: Aug 2, 2023 10:55:39 AM IST

Updated: Aug 2, 2023 11:29:25 AM IST

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Mahindra Group has acquired 3.53 percent stake in RBL Bank Image: Shutterstock

There has been much media speculation about the rationale of the Mahindra Group in not just picking up a sizeable 3.53 percent stake in RBL Bank, but announcing it to the public after the deal was done. Of course, the mandatory disclosures on public shareholding in a listed company required this. But if this was just a secondary market transaction play, the automotive-to-technology conglomerate might not want to make a splash of it.

There are some things that stand out which make RBL Bank a good bank to acquire: It has the potential, but it is expected to play out over a long period. It is one of the few mid-sized banks that has a diversified institutional shareholding and is not held by a promoter group or family.

The lack of clarity on what the deal holds for investors going ahead, has reflected in a sluggish trend for the RBL Bank and M&M stocks. The M&M stock closed down 3.55 percent at Rs 1,490 at the BSE on Tuesday, from Rs 1,544.8 on July 26, when reports of the deal emerged. The RBL Bank stock has fallen 6.35 percent to Rs 224.9 at the BSE, from Rs 239.2 on July 26.

The Mahindra Group has only disclosed a brief statement to the stock exchanges, that it had “acquired a 3.53 percent stake in RBL Bank as an investment at a cost of Rs 417 crore”. This stake is as of July 21, 2023, RBL Bank has said. In the clarification to the stock exchanges, M&M also said, “We may consider further investment, subject to pricing, regulatory approvals and required procedures. However, in no circumstance will it exceed 9.9 percent.” (This is the maximum stake that an institution can hold in a bank, but not as a promoter.)

When contacted, M&M told Forbes India that it was “in a silent period and hence won’t be able to comment any further”. The Group’s action is being considered by some to be a strategic, long-term move.

RBL Bank in a statement to stock exchanges said: “Presently, there are no negotiations/events which are required to be reported pursuant to the provisions of Sebi (Listing Obligations and Disclosure Requirements) Regulations, 2015 as amended.” The bank also said it was “not aware of any information that has not been announced to the exchanges which could explain the movement in the trading. Considering that the bank is not aware of any information as stated above, as of date this article does not have any material impact on the bank.”

This deal makes M&M the second-largest investor, after Maple (9.98 percent). CDC Group holds a 5.53 percent stake in RBL Bank, as of June 2023; ICICI Prudential Life Insurance (3.28 percent) and Nippon India Small Cap fund (3.09 percent) are other prominent shareholders.

Also read: Can V Vaidyanathan's Midas touch turn IDFC into a banking behemoth?

The possibility of a shift in regulatory thought?

Bankers who we spoke to said the regulator may want to consider relaxing the shareholding norms slightly for corporates, towards picking up stake in banks. “Elections are round the corner [2024], and there could be a possibility that the Reserve Bank of India [RBI] may want to rethink and relax some of its key policies, relating to ownership,” a banker told Forbes India, on condition of anonymity.

In recent years, the RBI has been cautious and reluctant—despite an internal working group’s recommendations in 2020—to allow corporates and industrial houses to become promoters of banks, after necessary amendments to the Banking Regulation Act, 1949. Some corporates, including Bharti Airtel and Reliance Jio, chose to opt for a differentiated banking licence (such as payments banks).

The RBI has made it clear that important shareholders (those with shareholding of 5 percent and more) are ‘fit and proper’, as laid down in the 2004 guidelines, on acknowledgement for allotment and transfer of shares. It will be interesting to see if RBI grants approval to M&M’s stake in RBL Bank, as and when it creeps above 5 percent and towards the 9.9 percent limit.

RBL Bank is growing at 21 percent in terms of advances, and interest income also grew around the same level year-on-year. Though its current and savings accounts (CASA) growth is improving at 12 percent year-on-year, the bank will need to boost deport growth in a competitive environment.

“It has a good franchise in terms of credit cards and microfinance segment,” says a banking analyst with a private equity research firm. It is among the largest credit card issuers in India, with more than 5 percent market share. Credit card loans comprises 43 percent of its retail loan book, business loans around 18 percent and microfinance 16 percent.

RBL Bank’s Managing Director and CEO, R Subramaniakumar, in its July 22 earnings call with analysts said the “bank has been able to sustain the momentum in the retail businesses and the retail disbursals”. Microfinance disbursals were strong at Rs 2,150 crore in the June-ended quarter. The RBI has approved Subramaniakumar’s appointment for a period of three years, till June 22, 2025.

At the time of the RBL Bank’s Q1FY24 earnings, Subramaniakumar had responded to a specific query on the Mahindra deal by saying: “As a rule, we don't comment on anything which is of a secondary nature. That's not for us to make, it is an open market.”

A JP Morgan team of analysts says in a July 27 report that the investment came “as a surprise” to them and investors. “M&M’s investment in RBL Bank may need to be seen in a longer time-frame context and a potential hope for a regulatory change down the road,” analysts Amyn Pirani, Saurabh Kumar, Vaibhav Zutshi and Pranuj Shah say in the report. “Key questions/concerns range from capital allocation discipline, a decision of investing in a bank (considering that industrial groups are not permitted to have a bank) as well as the future of Mahindra Finance.”

Also read: Prashant Kumar: Rewriting the Yes Bank story

Will this deal assist another bank?

Besides the possibility that there might be some relaxation in regulatory thinking, the grapevine is that Kotak Mahindra Bank might be interested in acquiring RBL Bank at a later stage, considering that its expression of interest to bid for IDBI Bank might emerge as a tricky acquisition. “IDBI Bank is culturally different from Kotak Mahindra Bank. It would be nothing like its ING acquisition. There are challenges of size and integration,” says a banking analyst with an equity research firm.

If the IDBI Bank acquisition does not materialise, Kotak Mahindra Bank may want to go scouting for another private bank, such as RBL Bank, while it is growing. Kotak Mahindra Bank declined to respond to an email from Forbes India.

The government and LIC of India, who are joint promoters in IDBI Bank, are seeking to disinvest majority stakes that each of them hold in the bank. A healthy deposit franchise, wide reach, profitability and near-complete provision for bad loans make it a good acquisition in terms of value, but which will be difficult to extract. Synergising work cultures, strengthening technology and finding the right price are going to be major concerns for a possible acquirer.

RBL Bank has the potential for growth, but it would take time. The bank has an RoE of 8.39 percent as of Q1FY24, with the potential to grow to 10 to 11 percent by FY26. The bank’s management has identified a scaling up of secured retail products such as housing loans, rural vehicle loans and gold loans to boost its retail lending activity.

But a source with a venture capital fund argues that RBL Bank “may not see the tailwinds” that other banks are already seeing at their different phases of growth. “It may not be the best placed bank. Hence the Mahindra Group might want to see this deal as a strategic, long-term one.”