Industry structure: M&A in Indian BankingAshvin Parekh, Partner & National leader – Global Financial Services

3 December 2010

Industry Structure: M&A in Indian BankingPage 2

Regulatory Framework

Banking companies (Acquisition & Transfer of Undertakings) act 1970Section 9 empowers the govt. to make the scheme to carry out the following:

► Capital structure of corresponding new bank► Constitute the board of directors► Reconstitution of a new bank into two or more corporations or amalgamation of any new bank

with any other new bank

Companies Act 1956► Approval of the board of directors of individual companies for the draft proposal► Application in High Court► Approval of shareholders by 75% majority► Sanction by the High Court► Filing of the court order with the Registrar of Companies

RBI – Guidelines for merger/ amalgamation of private sector banks► Decision of merger has to be approved by 2/3rd of the total Board of the respective companies.

Applicable to PSU banks also.Amalgamation between two banking companies

► Approval by shareholders with 2/3 majority► After approval the scheme should be submitted to RBI

Industry Structure: M&A in Indian BankingPage 3

Acquisitions over the last decade

Date of merger Acquirer bank Target bank

Assets of target bank as % of acquiring bank’s assets

Number of branches of target

bank

August 2010 ICICI Bank Bank of Rajasthan 0.05 463

February 2008 HDFC Bank Centurion Bank of Punjab 20 394

August 2007 Centurion Bank of Punjab Lord Krishna Bank 11 110

April 2007 ICICI Bank Sangli Bank 0.5 190

March 2007 Indian Overseas Bank Bharat Overseas Bank 6 102

October 2006 IDBI United Western Bank 8 230

September 2006 Federal Bank Ganesh Bank of Kurundwad 1 32

October 2005 Centurion Bank Bank of Punjab 106 136

August 2004 Oriental Bank of Commerce Global Trust Bank 17 104

February 2003 Punjab National Bank Nedungadi Bank 2 173

March 2001 ICICI Bank Bank of Madura 36 350

February 2000 HDFC Bank Times Bank 75 39

Need to let M&As be business driven within broad regulatory framework

Industry Structure: M&A in Indian BankingPage 4

Global comparison (1/2)

Rank Bank Total Assets ($bn)

1 BNP Paribas 2,965

2 Royal Bank of Scotland Group 2.750

3 Crédit Agricole 2,441

4 HSBC Holdings 2,364

5 Barclays 2,235

6 Bank of America Corp 2,223

7 Deutsche Bank 2,162

8 JP Morgan Chase 2,032

9 Mitsubishi UFJ Financial Group 2,026

10 Citigroup 1,857

68 State Bank of India 279

111 ICICI Bank 103

Source: The Banker – Top 1000 World Banks 2010

Top 200 No. of Banks

USA 27

Japan 18

Germany 15

China 13

Spain 13

India 3

Top 1000 No. of Banks

USA 183

Japan 102

China 84

Germany 72

Spain 41

Switzerland 37

India 31

Industry Structure: M&A in Indian BankingPage 5

Global comparison (1/2)

USA* UK* India

Commercial Banks 6,622 350 232#

Savings institutions 1,138 - -

Branches 98,913 15,000 69,160##

Total loans ($ bn) 7,389 5,953 765**

Total assets ($ bn) 13,383 4,137 1,135

Total deposits ($ bn) 7,738 3,870 1,053**

Population/ branch 3,136 4,156 16,962Source: FDIC (USA), Bank of England, Financial Service Authority, RBI*As on 31 October 2010; **As on 30 September 2010# All scheduled banks (77 SCB, 86 RRBs, 69 Co-operative)## Only SCB branches

► Indian banks lack size with only 1 featuring in the top 100 and 3 in top 200 globally► Two different approaches

► USA large number of banks for large coverage► UK smaller number of banks (153 incorporated in UK, 328 deposit taking)

► Population/ branch very high

Industry Structure: M&A in Indian BankingPage 6

Projected growth over next 5 years

Rs.(’000 crs) USD bn

PSU banks 300-350 65-76

Private banks 125-150 27-32

Foreign banks 42-46 9-10

Total 467-546 101-118

Source: Ernst & Young Research estimates

Estimated Capital Requirement in 2015

► Strong projected economic growth► Banks advances to grow at a CAGR of 20%, to become 2.4 times the

current size by 2015► Estimates do not factor in requirements on account of financial inclusion

thrust

Need for “Mega Banks” to bring in capital and scale

Industry Structure: M&A in Indian BankingPage 7

Industry structure

Industry structure will help alignment of customer segments and services

► M&As essential for creation of Mega banks

► M&As among mid and smaller sized banks will drive efficiency and growth

► Mega banks will be able to support industry in global expansion

► Regulatory framework should allow for inorganic growth especially among private and foreign banks

Mega banks

Medium sized banks

Smaller banks

Industry Structure: M&A in Indian BankingPage 8

M&As in banking – lacking regulatory and legal framework

Public sector► Natural regulatory path not available► Who will initiate the process? Banks themselves or the govt.► Labour/ human resource concern; unions opposed to the move

Private sector► Regulator driven

Foreign banks► Regulatory restrictions

Reforms needed in M&A regulatory structure

Thank you