The Next Big Thing.

     First of all, please don’t let the title fool you. This article has nothing to do with the so – called ‘Next Big Thing’, Brock Lesnar. As far as Lesnar goes, his upcoming clash with The Undertaker at WrestleMania 30 is bound to be one for the ages but a victory for The Undertaker, with his streak advancing to an incredible 22 – 0, is sure-fire. And that’s a prophecy that you first read on this blog. But that’s enough digression for now and it’s time to cut to the chase.
                                          
     If there’s one thing that we can all learn from the Oracle of Omaha, Warren Buffett, it’s that most fortunes are made in the long run. The gameplan, according to the legend, is to spot a company when it’s virtually ignored by the bourses, buy into it and sit back and enjoy the ride when the markets eventually warm up to the company in question. All that, however, generally takes time. And then there’s another way to make money, one that’s often fraught with risk. That way would involve taking a risky bet on a stock based on a potential occurrence in the near future and then cashing out when that prophecy turns into reality. And of course, if that prophecy turns out to be a pipe dream, the only way out is to cut your losses and run for cover.

     Speaking of pipe dreams, the RBI, under its ambitious project of financial inclusion, has devised a grand plan to take the banking system to every nook and corner of India. Instead of taking the sensible route and consolidating the public sector banks under the State Bank of India umbrella, the RBI has announced its intent to issue new banking licenses, all with the objective of setting up several new banks. As far as the Indian banking system goes, the prevailing scenario is hardly worth writing home about. Both credit growth and deposit growth rates are slowing, spreads are shrinking and more and more borrowers seem to be defaulting by the day. In fact, the non-performing assets (NPAs) of the public sector banks are closing in on the 3% mark and that figure is only headed northward. Despite all the headwinds, both government and private companies seem to be lusting after those prized banking licenses like there’s no tomorrow.

     Over the past year or so, a whole host of entities such as LIC Housing Finance, IDFC, India Post, the Tata Group, the Mahindra Group, the Aditya Birla Group, the Shriram Group and L&T Finance Holdings have all thrown their names into the hat. In the midst of the rush to obtain a banking license, as far as the big business groups went, concerns erupted about the possible diversion of funds from the proposed banking arms to their sister companies. The RBI has also announced a scrutiny of all the applicants in order to prevent any banks from going under, à la Global Trust Bank. Furthermore, the RBI has stipulated a minimum capital requirement of Rs. 500 crores, in order to set up a banking arm. In the wake of all this, the Tatas and the Mahindras, the two largest contenders, withdrew their applications, citing roadblocks regarding their subsidiary companies and their respective shareholding patterns. The enthusiasm of the other applicants, however, hasn’t dampened and taking an investment view of the whole banking license saga, there’s some money to be made where that came from.

     While there may be some high – profile applicants for a banking license, at the end of the day, some of the lesser – known names do stand a great chance of emerging successful as well. One of those names is a certain JM Financial. The listed merchant banking and financial advisory firm, which has played a major role in engineering some of the largest M&A (mergers and acquisitions) deals in India such as the Financial Technologies’ divestment of MCX and the $1.2 billion United Spirits – Diageo deal (which, if I may add, was accurately predicted on this blog over a year before it happened), has now set its sights on the banking space. Of course, JM Financial is a minnow compared to the other biggies in the banking license race but a few factors do seem to indicate that David might just trump all the Goliaths.

     Almost two years ago, an announcement by Citibank took the world of finance by storm. Michael Corbat had taken over as its chief and Vikram Pandit was made to walk the plank by the Board. After exiting Citibank, Pandit chose to lay low for over a year. And then, six months ago, JM Financial shocked Dalal Street when it revealed that Pandit had picked up a 3% stake via convertible warrants (contingent on the company’s stock price, 3 years down the line) and was all set to spearhead the company’s foray into the banking sector. Moreover, Pandit has also announced that he intends to set up a distressed assets fund with JM Financial but the timings of his entry and JM Financial’s banking aspirations do not seem to be a coincidence at all.

     A couple of weeks ago, clarity emerged on the allotment of the banking licenses, following an announcement from the horse’s mouth. Raghuram Rajan, the RBI Governor, declared that the RBI would issue the licenses by the end of fiscal 2014, after studying the recommendations of the Bimal Jalan – led committee’s report. So where does JM Financial figure in all this? Well, it just so happens that the RBI’s committee on financial inclusion, which is behind the issue of banking licenses, has inducted a certain Vikram Pandit. Moreover, that said Vikram Pandit is a close confidant and advisor to Raghuram Rajan, who does have the last word on the whole banking license exercise. Putting two and two together, that does seem to significantly boost JM Financial’s chances of securing a banking license.

     For now, JM Financial’s scrip is trading in the range of Rs. 25 but the company hasn’t revealed its banking sector gameplan. The entire exercise of conceptualizing a bank, setting it up and expanding it is indeed a herculean task. Being virtually debt – free, JM Financial could easily set up its own network of bank branches and expand organically. Or, it could take the inorganic route and acquire one of the smaller banks. So what does the company seem keen on doing with a banking license? Well, quite frankly, that’s irrelevant in the short run. There are certain scrips that you punt for a quick gain, make your money and then exit, stage right. JM Financial is shaping up to be one of those trades. A return of anywhere between 10 and 30% seems to be in the offing in the near term. But for now, it’s a game of wait and watch. The RBI should allot the banking licenses by the end of March. If... no, not if... when that happens, JM Financial is all set to be a certain recipient and its stock would spike, in a knee – jerk reaction. In the long term, JM Financial may just turn out to be the next big thing. 

     But don’t just take my word for it. Bank on it. 

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