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Our Bureau

MR M. VENUGOPALAN

Bangalore , Dec 18

Federal Bank continues to be on the prowl for acquisitions and is in talks with some private sector banks in Tamil Nadu and Karnataka.

Speaking to newspersons today, Chairman and CEO Mr M. Venugopalan said: "Mergers are a necessity if small banks are to remain competitive."

He refused to name the banks with whom such discussions are being held.

The pursuit of such routes of growth is despite Federal bank's failure to acquire United Western Bank, where it was one of the frontrunners. Federal Bank recently acquired Ganesh Bank in Maharashtra.

In addition, the bank is pursuing organic growth and plans to open 30 branches this year.

Mr Venugopalan said that the integration process was still under way. On the final cost of Ganesh Bank's acquisition, he said that auditing of the accounts was under way.

"These costs can easily be absorbed into the balance sheet of Federal Bank."

He said that the acquisition would have a negligible impact on Federal Bank's balance sheet.

Federal Bank currently has capital-to-risk weighted assets ratio of over 12.80 per cent. Besides, the bank has sufficient flexibility to raise more resources to beef up its capital, Mr Venugopalan said. This includes raising funds by way of equity to strengthen tier I capital.

The bank has the option to push up the paid-up equity capital by another two million shares.

The option is likely to be exercised in the next fiscal either through a rights issue or through a public offer.

This year, the bank has so far raised Rs 200 crore in the form of tier II bonds.

It has the flexibility to another Rs 250 crore during the year. Currently, about 55 per cent of its deposits come from Kerala, though 55 per cent of its loan book is accounted for by other States.

But, he said, the reliance on Kerala-based deposits has kept costs on the high side. The average cost of funds for Federal Bank is currently 5.6 per cent, above the industry average of less than five per cent.

These costs would have been higher but for the retiring of Rs 600 crore of high-cost resources, he said.

Besides, Mr Venugopalan said, the high costs were largely on account of its low base of current and savings accounts of just 26 per cent. The bank plans to raise the base to 28 per cent by the end of the year.

The bank's net interest margin is at 3.19 per cent, he said, on account of the high yield of assets (9.6 per cent).

As a result, it has ruled out any increase in the benchmark prime lending rate immediately.

"We will review the situation in January and take a decision on revising the benchmark prime lending rate."

Federal Bank also hopes to kick of its insurance venture next year through the three-way joint venture with Fortis Insurance International and IDBI Bank. The bank holds 26 per cent in the venture.

The capital requirement for the venture has been estimated at Rs 850 crore over a seven-year period.

More Stories on : Mergers & Acquisitions | Private Banks

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