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MUMBAI, Oct 28 (Reuters Breakingviews) - Blackstone (BX.N), opens new tab is the newest entrant to a fundraising party at India’s small lenders. The U.S. private equity group is paying roughly 62 billion rupees, opens new tab ($705 million) for warrants that would amount to a 9.99% stake in Federal Bank (FED.NS), opens new tab. It's a bold call that the mid-tier financial institution can punch well above its weight. In setting itself up as the single largest shareholder of the bank in India's wealthy Kerala state, Blackstone is backing the vision of new-ish CEO, KVS Manian, who wants to turn Federal into a top-five private sector operator. That would repeat the success of $48 billion Kotak Mahindra Bank (KTKM.NS), opens new tab, where Manian spent three decades and led their corporate business. He was once a candidate to succeed Uday Kotak as CEO but was ultimately passed over in 2023. Sign up here. It’s an opportune moment for Blackstone to put its dream of owning a bank into action. The Reserve Bank of India is relaxing its high barriers to foreign ownership of private lenders: it allowed Japan's Sumitomo Mitsui Banking Corporation (8316.T), opens new tab to acquire a 20% stake in Yes Bank (YESB.NS), opens new tab in May and it looks set to clear Dubai-based Emirates NBD's (ENBD.DU), opens new tab $3 billion bid for a controlling stake in RBL Bank. There are two issues, however. The first is that Blackstone is starting from a weak position. It will only hold a minority stake. It may want to increase that shareholding but there is no outlined plan or timeline for that to happen and it will depend on the regulator's blessing. The U.S. group has generated a stunning 41% net internal rate of return on its current Asia private equity fund with the support of a largely control-oriented strategy in India. For now, though, its fortunes are largely in Manian's hands. The second is that breaking into India's hypercompetitive banking big league looks easier said than done these days. The Blackstone deal will give the bank capital to expand nationally via acquisitions, and there are potential synergies from cross-selling products from its portfolio company ASK Asset & Wealth Management to Federal's customers. But top lenders State Bank of India (SBI.NS), opens new tab, HDFC Bank (HDBK.NS), opens new tab and ICICI Bank (ICBK.NS), opens new tab have a strong grip over mortgages and lucrative salary accounts. Throw in other freshly capitalised rivals, and competition for quality customers looks certain to ramp up fast. At least Blackstone is only paying a small 7% premium to Federal's undisturbed share price for the chance to live out its banking dream. Follow Shritama Bose on LinkedIn, opens new tab and X, opens new tab. Context News For more insights like these, click here, opens new tab to try Breakingviews for free. Editing by Una Galani; Production by Aditya Srivastav Breakingviews Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time. Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors. Shritama Bose, India columnist, joined Breakingviews in November 2022. She covers the financial sector and related topics from Mumbai. She was earlier a reporter at Financial Express, a top business daily newspaper, tracking the Reserve Bank of India, lenders and fintech companies. She has a bachelor’s degree in English Literature and a postgraduate diploma in journalism.
