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Is it time to buy stocks of companies which have applied for a banking license?


 Is it time to buy stocks of companies which have applied for a banking license?
This week saw a rally in stocks of banking license applicants like L&T Finance, LIC Housing and IDFC among others, as the Jalan Committee headed by former Reserve Bank of India governor Bimal Jalan submitted its comments on granting licences to some of the 25 applicants that have applied for a banking license.

LIC Housing Finance shares moved up from 201 to Rs 206 in a span of few days, while IDFC saw marginal gains. L&T Finance Holdings on the other hand gained on Feb 25th, the day the Jalan Committee submitted its report, but has since fallen back to the same levels.


Many analysts do not see any significant gains for the banking license applicants, except the occasional knee jerk reactions every now and then.

Setting up a bank, means that one needs to also set aside huge sums of money to meet statutory requirements including SLR and CRR and mobilising deposits in the present scenario may be a herculean effort.

Also, some of the share price of companies like L&T Finance Holdings are not avalaible at particularly cheap valuations. With a price to book value of over three times, the stock is not particularly cheap.

On that count it makes more sense to buy a stock like IDFC, which is available at almost one time its book value and with a decent P/E multiple of around 7 times. Also, LIC Housing also looks reasonably good.

It's also important to remember that there are as many as 25 aspirants for a banking license and the RBI is not likely to issue many licences. If for some reason the licence is not issued, the stocks are likely to react sharply. And remember, most of the contenders for a banking license are strong contenders including Aditya Birla, Nouvo, Reliance Capital and the like.


In the last 20 years, the RBI has issued 12 banking licences. It would be difficult to see them giving more than 4-5 banking licences this time. So, it's a real gamble, buying a stock on the hopes of a banking license. Though, one would like to bet on strong contenders like IDFC and LIC Housing Finance.

Story first published: Thursday, February 27, 2014, 10:19 [IST]
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