Presentation on Idbi-corp

8/14/2019 Presentation on Idbi-corp

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PRESENTATION ON

PROPOSED

IDBI BANK-CORPORATION BANK

MERGER

PRESENTED BY: ARUN.B.M

PARAM

VENKATESH


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HISTORY OF INDIAN BANKING

Banking in India originated in the first

decade of 18th century with The General

Bank of India coming into existence in

1786.

By the 1960s, the Indian banking industry

has become an important tool to facilitate

the development of the Indian economy.


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Continued

This move, along with the rapid growth in theeconomy of India, kick started the banking sector

in India, which has seen rapid growth with strong

contribution from all the three sectors of banks,

namely, government banks, private banks andforeign banks.

Currently, India has 88 scheduled commercial

banks (SCBs)

28 public sector banks

29 private banks

and 31 foreign banks.


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HISTORY OF CORPORATION BANK

Corporation Bank is one of the oldest BankingInstitutions in the Dakshina Kannada district of

Karnataka and in India.

A step was taken by Shri Khan Bahadur HajiAbdullha Haji Kasim Saheb Bahadur, a

businessman of Udupi.

12th of March 1906 with a group of philanthropist

founded the Canara Banking Corporation ofUdupi Limited.


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HISTORY OF IDBI

The birth of IDBI bank took place after RBI

issued guidelines for entry of new private

sector banks in January 93.

The Reserve Bank of India conveyed it's in

principle approval to establish IDBI bank

on February 11th, 1994. Thereafter the bank

was incorporated at Gwalior underCompanies Act on 15th of September 1994.


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Reasons behind the merger

IDBI-CORP

IDBI bank has shown keenness in acquiring

another bank either in public or private

sector.

Corporation Bank having wide branch

network, superior technology usage and

wide product base appear as a suitabletarget for the acquisition.


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Synergies of the Merger

Positives: (Superscripts below refers to CAMELratios)

(1)Improved Debt to Equity ratio after merger

thereby decrease gearing on its balance sheet.(1)

(2) Reduced exposure to market by investing

more in G-Sec or risk free securities.(2)

(3) Lowering of NPAs in IDBI.(3,4)(4) Utilization of better recovery mechanism of

NPAs.(5)

(5) Increase in the net-worth of the bank.(6)


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Continued

(6) Better utilization of the working funds.(7)(7) Surge in Net Interest Margin (NIM) and hence

Improved Profits.(8,9)

(8) Improved Return on Assets.(10,11)

(9) Significant Improvement in the Rural Branch

Network from existing 10.5% to 16% (Annexure I)

which will lead to better penetration of already

existing Agri Business product portfolio.


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Negatives

(1) Corporation Bank has poorest Advances to Assets Ratio.(2) Business per Branch of the merged entity to be decreased

by 45% in case of no foreclosures of branches.

(3) Business per Employee to be decreased by 25% in case of

no lay-offs.(4) Assets per Branch of merged entity to be decreased by

49%

(5) Assets per Employee to be decreased by 29%.

(6) Profits per Branch of merged entity to be decreased by32%

For Detailed Analysis refer Annexure II


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Legal Hurdles of the Merger

Banking regulation(BR) Act, 1949

The Act provides for two types of

amalgamations:

1.Voluntary(sec 44A of the BR Act)

2.compulsory


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Three Stage Dividend Discount Model

It is the most general of the models because

it does not impose any restrictions on the

payout ratio and assumes an initial period ofstable high growth, a second period of

declining growth and a third period of

stable low growth that lasts forever. Figure

below graphs the expected growth over the

three time periods


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Implicit Assumption:

Only dividends are paid. Remaining portion ofearnings is invested back into the firm, some inoperating assets and some in cash & marketablesecurities.


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DDM Valuation of Corporation Bank

Corporation Bank reported a return on equity of

17.52% for FY08 and paid out dividends per share of

Rs 10.50 year (on reported earnings per share of Rs

52.33). We will assume that its bigger asset base

build over by high debt will allow the bank to

maintain its current return on equity (low by industry

standards) and retention ratio for the next 7 years,leading to an estimated expected growth rate in

earnings per share of 10%.


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Payout Ratio = Dividend per share/ Earning per share =10.5/52.33= 20.06%

Expected Growth rate = Retention ratio * ROE =

(1- 0.2006)* 17.52% = 14.00%

Analyzing & then normalizing the normal EPS growth

rate we found, that actual growth rate is 10.02% and not

14% as calculated for the annual one.


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The estimated earnings and dividends per share

each year for the next 15 years


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EV/EBITDA Multiple:

Enterprise value (EV) is total company value (themarket value of debt, common equity, and preferred

equity) minus the value of cash and investments. Also,

EV= Market Capitalization+ Market Value of Debt-

Cash & near Cash

Numerator is enterprise value, EV/EBITDA is a

valuation indicator for the overall company rather than

common stock the analyst can assume that the

business's debt and preferred stock (if any) are

efficiently priced.


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Calculations provided in the spreadsheet under thesheet multiples valuation reflect the current market

scenario (Low Market Capitalization) of equitythereby giving depressed valuations for both the

banks (IDBI: Rs53.48 & Corp.: 209.60). Both the

values are eroding the net worth of the company

and does not justify the real worth of both the setof companies.


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MERGER VALUATION OF

IDBI & CORPORATION BANK

Considering the credit crisis in the global financialmarkets, among the various modes by which IDBI

may finance the deal would be through all swapdeal. The reasons being:

1. IDBI having a very high gearing of almost 6.46

(D/E) makes it incapable of raising any cash from

the market. Hence, it would not be possible to go

for all cash deal.


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2. With the current credit crisis, it will be almostnear impossible for IDBI bank to create an

Leverage buyout. Further, traditionally govt.

banks in India, they have never followed these

methods.

3. An all swap or swap-cash deal is more then

possible thereby maintain regulatory requirements

of over 50% Govt. holding in any scenario.


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Swap ratio

Calculated based on book value method

NOTE: Swap ratio taken into Consideration is 3.18:1 i.e. 3 IDBI share for 1 shares of

Corp Bank


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Swap ratio

For All Swap Deal:

Calculated using DDM valuation Prices obtained for banks


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valuation

Value of IDBI= 92.37*72.346682.04(crores)

Value of CORP= 311.11*14.34

4461.31(crores)

Merger cost = 4335.40

Combined entity:

value of (IDBI+CORP)+synergy

(6682.04+4461.31)+(60% of IDBI+CORP)


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11143.35+6686.01= 17829.36NPV= (benefit-cost)

Benefit = value of combined-(IDBI+CORP)

=17826.36-(11143.35)=6683.01

Cost = 4335.40

NPV = 6683.01-4335.01= 2350.61


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Conclusion

According to us an all swap deal will allow IDBI touse the client as well as asset base in a betterway,also by having Corp. Bank, it will be able todeleverage itself in the current credit crisis scenario

where most leverage banks fall the fastest.The all swap deal will give approximately Corp. bank a share of 39.35% in IDBI Bank. The swapratio of 3.27 being calculated above using both theBook Value as well as DDM prices. Theapproximate deal size obtained on the basis of theNov14 ,2008 current prices is 4335.4 Crores.

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