Blackstone invests in Federal Bank as M&A boom in India's financial services sector continues

Private equity giant Blackstone has built a sizeable presence in India’s real estate sector. It's now checked into Kerala-based private sector lender Federal Bank, adding to a slew of foreign investment deals seen in the space in 2025.

Blackstone will invest Rs 6,196 crore in the mid-size lender to acquire a 9.99 per cent stake through its affiliate Asia II Topco XIII Pte, via a preferential issue of over 27 crore warrants. Each warrant carries a right to subscribe to one fully paid-up equity share of Federal Bank having a face value of Rs 2. The deal was done at Rs 227 a share. The stock closed at Rs 227.40 on Friday, little changed from previous close.

Blackstone’s investment in Federal Bank is a testimony of growing foreign investor interest in the sector.

Earlier this year, Japan’s Sumitomo Mitsui Banking Corp (SMBC) had picked up a stake in Yes Bank. SMBC is a unit of Japan’s second largest banking group Sumitomo Mitsui Financial. It had acquired a 20 per cent stake in Yes Bank for Rs 13,482 crore, later raising it by 4.99 per cent. SMBC received the approval from Reserve Bank of India to acquire the stake stake in Yes Bank in August.

In October, Emirates NBD announced an investment of about $3 billion (Rs 26,850 crore) in another mid-size private sector lender RBL Bank, marking the largest ever foreign direct investment in the Indian financial services sector. The deal will give Emirates NBD a 60 per cent stake in RBL Bank.

Separately, Warburg Pincus and Abu Dhabi Investment Authority (ADIA) picked up a close to 15 per cent stake in a IDFC First Bank with the investment of around Rs 7,500 crore.

Smaller and mid-size banks in India need capital to scale up. Valuations across the banking sector meanwhile have been reasonable. At the same time, banks have cleaned up their balance sheets over the past several years, and non-performing assets have been low. All this makes the sector attractive for investors, particularly given that India remains among the fastest growing economies in the world and the market offers long-term growth opportunities.

“This strategic alignment brings together RBL Bank’s growing domestic franchise with Emirates NBD’s regional reach and financial expertise, creating a unique platform for growth and innovation,” Shayne Nelson, Group CEO of Emirates NBD, had said post the deal with RBL Bank.

The RBI monetary policy committee has so far this year reduced the repo rate by 100 basis points and also announced CRR (cash reserve ratio) cuts to boost liquidity in the system. This and other broad set of regulatory relaxations should progressively lower banks’ capital constraints, point analysts.

According to Goldman Sachs, consensus expectations for second quarter earnings of banks was low with earnings per share (EPS) growth expected to decelerate to 1 per cent for financial companies and fall 3 per cent year-on-year for banks, the slowest pace set since Covid-19.

However, the Goldman analysts opined that earnings could “inflect” from here with asset quality stabilising, signs of consumption revival and new RBI regulatory relaxation.

“Earnings sentiment for banks is at a one-year high. Peak drag on profit growth is likely behind us with financials profits to grow 15 per cent in calendar year 2026, up from 8 per cent in 2025, as per consensus, aided by loan growth recovery in banks,” they said.

The RBI had recently proposed lowering risk weights on various loan categories in a bid to free up more bank capital. Key changes include lowering of risk weights for entities rated in the AA, BBB and BB ratings categories and for A1 rating on the short-term scale.

“This would enable the banks to reduce the capital allocated to such exposures, leading to an improvement in the capitalisation profile of the banks,” according to ICRA.

Banks are not the only ones attracting strong foreign investor interest. Abu Dhabi investor Avenir Investment, an affiliate of International Holding Co. picked up a 41.2 per cent stake in non-banking finance company Sammaan Capital for $1 billion, earlier this month. That deal was said to be the largest ever primary capital infusion by any investor in the NBFC space.

“India represents a core strategic market for us, and its long-term growth fundamentals are compelling,” Syed Basar Shueb, CEO of IHC said.

The BSE’s banking sector index has gained near 5 per cent in the past one month, outperforming the broader Sensex, which has gained 3 per cent in the same period.