HSBC has sold its entire stake in India’s Axis Bank and Yes Bank through two separate, but simultaneous block trades, raising at least $419 million. The trades accounted for 4.75% in each bank and appear to be part of HSBC’s continuing disposal of non-core assets.
The transactions took place after the close of Indian trading yesterday and the shares will be crossed before the market re-opens today. Due to the risk of slippage (traders or investors not part of the deal “stealing” shares during the crossing), the final price will only be revealed after the cross has been completed. But according to sources, the blocks were well received by investors and the expectation late last night was that they would both price above the bottom of the indicated range.
This was the case even though India’s financial sector is facing a lot of headwinds at the moment, including sluggish economic growth, a weakening rupee that is preventing the central bank from cutting rates, and some concerns about stressed assets. However, private-sector banks, like Axis and Yes Bank, are viewed to be in better shape than government banks.
Investors also seem to have welcomed the opportunity to buy the two banks at a discount. Both deals were marketed at a 3% to 5% discount versus yesterday’s close, which while not super generous, was seen to be decent.
Investors are also starting to become somewhat used to concurrent blocks after two such trades by Temasek in Bank of China and China Construction Bank and a sell-down by Waddell & Reed in Macau casino operators Sands China and Wynn Macau two weeks ago. A key benefit for selling two stocks in the same sector at the same time is that it limits the potential for an overhang. This could quite easily form if the market starts to speculate that the seller will soon dispose of shares in the second counter as well.
The larger of the two blocks in dollar terms was Axis Bank. HSBC offered 19.6 million shares at a price between Rs950.9 and Rs970.9, translating into a total deal size of Rs18.64 billion to Rs19.03 billion ($326 million to $333 million). The deal accounted for about four days of trading, including derivatives-related turnover. The latter is relevant because there is an option expiring today, which typically leads to quite a bit of higher volume.
The Yes Bank transaction comprised 16.8 million shares that were offered at a price between Rs318.1 and Rs324.8. This gave a total deal size of Rs5.34 billion to Rs5.46 billion ($93 million to $96 million). Despite the smaller size, this deal accounted for about six days of trading, including derivatives-related turnover.
Given its smaller size, the relative level of demand was stronger for Yes Bank, and that deal was said to have been a few times covered. There was a belief last night that this may allow the price to be fixed close to the mid-point. Axis Bank was described as “comfortably covered”, and should price off the bottom.
Sources said the type of demand was quite similar for both deals with strong local support — this bodes well for the after-market performance — and good interest from global long-only funds, including some US-based accounts. About 40 to 50 investors took part in each of the transactions and there was said to have been quite a bit of overlap between the two deals.
Both stocks fell quite significantly from their intraday highs yesterday with Yes Bank slipping 2.8% from its morning peak and finishing 1.9% lower on the day at Rs334.85. Axis Bank held up better — and for longer — but still fell 1.5% from its high point to finish the day 0.2% lower at Rs1,000.95.
Even so, this was viewed as one of the few windows in the past few weeks when this dual transaction could get done. When Waddell & Reed did its dual-block in the two Macau casino stocks on June 14, raising $253 million, there had been no Asian block trades since mid-May. It was followed by three other trades last week in Tsingtao Brewery, Far EasTone Telecommunications and Korean construction company KCC, and while the response to these deals was mixed, the key take-away was that investors are willing to put money to work again — as long as the discount is reasonable.
There have been quite a few disposals of Indian banks this year by financial sponsors and other international financial investors as the former were taking advantage of a rebound in the Indian market early in the year and the latter are reducing their exposures to overseas financial stocks to comply with new capital requirements.
The largest was Citi’s $1.9 billion exit from HDFC, but there have also been a number of smaller sales by the likes of Carlyle, Warburg Pincus, Temasek, Khazanah and Rabobank.
And the fact that HSBC is following suit shouldn’t come as a surprise. The UK-headquartered bank undertook a group-wide portfolio review last year with the aim of improving its capital deployment and, on the back of that, sold — or closed — 16 non-strategic businesses in 2011. In the first four-and-a-half months this year it announced another 14 disposals or closures, including the sale of its card and retail services business and its upstate New York branches in the US; the closure of its retail banking businesses in Poland, Russia, Georgia, and Kuwait; the sale of its operations in Chile, Costa Rica, El Salvador and Honduras; and the sale of its retail operations in Thailand.
Going forward, the group’s key strategy will be to capitalise on two major trends – the continuing growth of international trade and capital flows; and wealth creation, particularly in faster-growing markets. According to earlier announcements, the focus is to build on its existing presence in the network of markets that generate the major trade and capital flows and to capture wealth creation in target markets. It will focus on retail banking only where it can achieve profitable scale.
The disposals and closures in 2011 should reduce the bank’s risk-weighted assets by about $50 billion and transfer approximately 12,000 full-time employees to the acquirers, HSBC said in its 2011 annual report.