THEMATIC:
Regional Banks: The search for a pan-India
franchise
Regional banks have differentiated themselves
from PSU banks on asset quality and now trade at a premium to PSU banking
stocks. Their profitability and valuation differential to large private sector
banks has, however, persisted, owing to higher cost of funds, low fee income
generation and higher cost to income. The improvement on all these three
parameters, we find, is related to the quality of the liability franchise, for
which geographical diversification is the only lasting solution. The evolution
of ING Vysya Bank (IVB) also proves the significance of geographical
diversification. Even as Federal Bank (FB), Karur Vysya Bank (KVB) and South
Indian Bank (SIB) manage their asset quality risks, their operating performance
would remain constrained due to their liability franchise. City Union Bank
(CUB), on the other hand, has done better under similar constraints and looks
likely to outperform its peers on growth and profitability.