HNB buys 2.6% of NDB Bank for Rs. 690 m

Tuesday, 19 April 2011 00:55 - - {{hitsCtrl.values.hits}}

Second largest private sector player HNB yesterday surprised the industry and the market when it paid Rs. 690 million to buy a 2.6% stake in competitor NDB Bank.

In a crossing involving 4.2822 million shares HNB paid Rs. 161.20 per share to buy the block from a US-based foreign fund.

The buy was the first deal on NDB Bank shares yesterday soon after which the share price rose to Rs. 166 and further to a peak of Rs. 170 before closing at Rs. 166.10 up by Rs. 1.50. In total NDB Bank saw 4.34 million shares traded for Rs. 700.3 million, which was the highest deal accounting for 29% of the total turnover in an otherwise subdued market yesterday.

By virtue of its stake, HNB becomes the fifth largest local shareholder in NDB Bank. Analysts viewed the investment, which appears to be a pre-arranged deal, as strategic. HNB already has a 12% stake in pioneering and only remaining development finance institution DFCC Bank thereby being the third largest shareholder.

The move is likely to thicken the state shareholding nexus in commercial banking sector which has come under lot of criticism from both within the industry as well as from the Opposition. However shareholdings of some of these entities such as EPF and SLIC are part of their investment portfolio.

NDB Bank has been scouting for a merger or an alliance with another for sometime whilst post-war given the growth dynamics and capital requirements in tandem with boom in lending, there is a growing chorus for consolidation within the commercial banking sector. Analysts ruled out as too early to speculate that HNB’s investment was a precursor to a possible consolidation move.

Collective shareholding of state entities in NDB Bank is 32% whilst in HNB it is over 22%. In Commercial Bank state entities own over 14%, over 13% in Sampath Bank and 30% in Seylan Bank. In DFCC this control is 33% whilst it also owns 15% stake in Commercial Bank.

Some analysts viewed HNB’s investment as portfolio. Last year HNB divested 1.43 million shares in Commercial Bank after transferring the stake to dealing securities. Cost of that stake was Rs. 95.8 million and as per 2010 closing price the shareholding in Commercial was worth Rs. 371.6 million. Sale of this stake as well as 1.48 million shares in Distilleries resulted in a capital gain of Rs. 497 million for HNB in 2010.

Industry experts partly blamed the growing nexus or interconnectedness of shareholdings and shareholders in some of these banks to business tycoon Harry Jayawardena’s original acquisition of control in Sri Lanka Insurance Corporation. Via SLIC certain strategic stakes were acquired or enhanced fuelling fears that a mega consolidation was on the cards. However after the redivestiture of SLIC with Treasury, the “Harry J factor” ended though by default the all pervasive “the state” has become the dominant force.

However the alleged “creeping nationalisation of banks” as coined by former NDB Bank CEO and now Member of Parliament Eran Wickremaratne has raised issues of government entities “acting in concert” and the State breaching the single owner limits; replacement of independent directors by the state as well as raising questions on the ability of the Central Bank to effectively and independently function as a regulator.