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Profitable Acquisition
34 B A N K I N G F R O N T I E R S J U L Y 2 0 1 0
t fxes very well in our strategy. It gives us 463
new branches, which is a 25% increase in the
number o branches, specifcally in north and western
India. We can garner new business through these
branches. These were the assertive, condent
words o Chanda Kochhar, managing director
and CEO o ICICI Bank, when she addressed
the press in the wake o the bank’s decision to
acquire Bank o Rajasthan. She went on to say
that an acquisition must be ‘The right t, at the
right price’.
Such optimism notwithstanding, skeptics
wonder whether the strategic and underlying
value justies the deal or whether Bank o
Rajasthan will t the bill. There are concerns
over the share swap ratio, which many analysts
consider as high, over the nancial health o Bank o Rajasthan and over its loan portolio.
However, there are banking analysts who are
optimistic, who say ICICI Bank acted proactively,
and who are emphatic that it is a right step toward
consolidation in the sector. They talk about the
benets o the reach that the 463 branches o
Bank o Rajasthan will bring in, o a higher CASA
and NIM and o a good SME book that will add to
the existing portolio.
SwAp RATIOAt today’s pricing, the swap ratio has valued
Bank o Rajasthan at Rs 2,833 crore, says Abizer
Diwanji, executive director, corporate nance &
head - Financial Services o consulting rm KPMG
India. “Given its 463 branches with a sizable
advances and deposit base, the value per branch is
roughly Rs 6.12 crore. ICICI’s value per branch is
Rs 49.94 crore based on its market capitalization.
The lower value per branch o Bank o Rajasthan
is mainly due to underutilization as a result o
a variety o regulatory and management related
issues. Accordingly, ICICI Bank would need to
just make 49 branches work as eciently as itsel
to not dilute its eciency ratios. Integration is
key to this as has been proved in past mergers like
Bank o Madura and Sangli Bank,” adds Diwanji.
He says an initial assessment o the banking
opportunity in Rajasthan and with certain o
Bank o Rajasthan’s clients and projects do
indicate a good potential given the act that
ICICI Bank’s presence in that region is lesser
compared to its presence elsewhere in the
country. Most large banks like ICICI Bank and
HDFC Bank, which have grown in recent times
have taken a decade or more to scale its 2000odd branches and getting 463 scaled branches
at a go is certainly a good value proposition and
the pricing seems accretive.
REDUCES TIME TO MARKETMonish Shah, director, Deloitte Touche
Tohmatsu India, tends to concur. He says in
terms o branch network, ICICI Bank would
expand by 23% with addition o the 463 Bank
o Rajasthan branches to its existing 2000 plus
branches. “ICICI Bank has set up around 400
branches in a year on an average or the last
three years. So an acquisition o 463 branches
reduces its time to market by a year to set it
up and maybe around two more years or it to
acquire scale,” adds Shah.
Describing it as a ‘preemptive acquisition’,
Shah says “This deal has provided ICICI Bank a
dominant presence in a growing geography, an
opportunity to urther diversity its book as well as
get a competitive edge over its peers. From ICICI
Bank’s perspective, in addition to the business
value emanating rom Bank o Rajasthan’s book,
it seems to have added two other parameters -
the value which it can extract rom increasing
the eciencies o Bank o Rajasthan as well as
the premium it would want to pay to avoid acompetitor acquiring the bank and gaining scale
advantages.”
BRANCHES ARE IMpORTANTYet another banking sector analyst
says branch network is indeed one o the
important parameters in any acquisition in
the sector. Says Robin Roy, associate director,
ICICI Bank’s
decision to
acquire Bank of
Rajasthan at a
comparatively
high cost has
come in for some
flak. But some
banking experts
see value for the
bank and perhapsan indication of
things to come.
Executive editor
N. Mohan meets
three leading
experts and
reports on their
observations:
Chanda Kochhar
visualizes an
acquisition to be
‘the right t, at
the right price’
I
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B A N K I N G F R O N T I E R S J U L Y 2 0 1 0 35
PricewaterhouseCoopers: “The correct
valuation o any bank can be made based
on several parameters, the number o
established branches being one o them.
For a country like India with its geographic
vastness, banks can cater to the needs o
its customers only with a good mix o
online and ofine channels. Being a keen
watcher o the banking scenario in the
country rom a traditional perspective, I
will give emphasis to branches as quitea chunk o the banking customers today
would preer to have personal interactions.
Roughly the cost o setting up a branch is
around Rs 5 crore to Rs 6 crore and the
whole process o making the branch ully
unctional and productive is estimated to
take years. So, in this light, the acquisition
o Bank o Rajasthan is o considerable
gain or ICICI Bank. Mind you as much as
60% o the 463 established branches are
in Rajasthan.”
Roy says through its earlier
acquisitions - Bank o Madura and Sangli
Bank-
the bank has been able to expand
its network in the southern and western
part o the country. It had a problem with
the northern and eastern parts and this
acquisition will largely solve the issues
with regard to the northern states.
Shah o Deloitte too says the two
earlier acquisitions (350 branches o Bank
o Madura and 200 branches o Sangli
Bank) had indeed strengthened ICICI’s
position in the south and West. “With
the proposed merger, the bank would
leverage the strong regional presence o
Bank o Rajasthan in Rajasthan and othernorthern territories,” says he.
RRB IN ITS FOLD?He also points out another possible gain
or the bank: “Along with the branches o
Bank o Rajasthan, ICICI Bank may also
gain control o 58 branches o the regional
rural bank sponsored by the ormer, the
Mewar Aanchalik Gramin Bank, subject
to the approval o the Reserve Bank o
India. This RRB has branches in Udaipur,
Rajsamand and Pratapgarh districts o
the state, which would help ICICI Bank
to urther its reach in tier-
2 cities. This
would be a deal sweetener.”
Roy takes it urther. He says with the
RRB coming into its lap, ICICI Bank will
be the rst private sector bank to have a
sponsored RRB. “However, the legalities o
this need to be looked into and perhaps
clearance rom the regulator would have to
be obtained.”
Both Shah and
Roy emphasize on
the post-merger
action ICICI Bank
needs to take. Says
Shah: In order
to capitalize on
the merger, ICICI
Bank would need
to plan the mergerintegration to
realize the latent
benets in terms o
leveraging branch
network as well as corporate relationships.
Integration will be key to ensure that the
value envisioned at the time o the deal is
eectively captured in consummation.”
MAKING 1+1=3?Roy avers: “It is beyond prediction
at this moment and only time will
tell whether it has been a good buy
strategically. In any ideal merger, the
acquirer would wish to achieve 1+1=3.
The results will largely depend on the
dynamics o business, the correct due
diligence ollowed, anticipated growth
and possibly a global ootprint.”
Diwanji attempts to compare an
earlier merger. “Let us analyze the merger
o Centurion Bank o Punjab with HDFC
Bank on similar parameters. The swap
ratio was around 29 share o CBOP or
each share o HDFC. Consequently around
6.99 crore HDFC Bank shares were issued
valuing the bank at Rs 10,500 crore at thethen prevailing HDFC Bank price. This
works out to a per branch cost o approx Rs
27 crore (or all branches acquired). HDFC
Bank got a very good retail ranchise, a
SME business and a two wheeler book
apart rom the branches. These would
have helped the bank build a strong SME
business on the back o
the acquisition, which
has helped its branch
banking initiatives.”
NOT A REALCOMpARISON
Shah does not exactly
agree. He says Indian
banking sector has not
seen many acquisitions
to provide any industry
benchmark on valuation.
“HDFC Bank’s acquisition
o Centurion Bank o Punjab was in
February 2008 and Lord Krishna Ban
was in August 2007. It does not seem
appropriate to compare this value; mor
so as the banking landscape has evolve
considerably in the last two years in th
backdrop o global recession, domesti
growth as well as evolving dynamic
in technology, products and custome
maturity. HDFC Bank acquired Centurion
Bank o Punjab at 15% discount to its then
market value while Bank o Rajasthan ha
been acquired at 90%premium to its marke
value. HDFC Bank’s acquisition was don
at Rs 23 crore per branch valuation, whil
ICICI Bank has valued Bank o Rajasthan
branch at Rs 6.5 crore. However, there ar
ew key actors o dierentiation between
the two deals, which should be considere
beore making any comparison. CBO
had much higher business per branch
(approximately Rs 90 crore) than Bank o
Rajasthan (approximately Rs 50 crore).“HDFC at the time o acquisition
had a branch network o 754 branche
while CBOP had a well diversied branch
portolio o 394. ICICI has a network o
1,900 branches and Bank o Rajasthan
network comprises 463. Hence, th
acquisition o CBOP was relatively mor
Monish Shah
describes the
acquistion as
preemptive, whichprovides ICICI Bank a
dominant presence
in a growing
geography and
an opportunity tofurther diversityits books
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B A N K I N G F R O N T I E R S J U L Y 2 0 1 0 37
impact integration could be operational
issues related to rationalization o branch
network, reworking product portolios,
mapping corporate customers and
integrating treasury operations. “The
challenges are going to be in the areas o
cost management, NPA management, risk
management and governance. However,
more than operational compatibility, the
biggest challenge would be to manage HR
compatibility. Cultural dierences are goingto be there in a largely local old private
sector bank and a global bank. But the key
will be to realize that the culture does play
its part in servicing the local clientele,”
says Shah.
Diwanji sees rebranding and
customer transition, both on the asset
and liability side, to be critical issues. He
says communicating with customers as
to how they would be serviced by the
merged entity is key. A quick success is
to make sure all channels o the merged
entity open up almost immediately to thecustomer through a temporary technology
bridge between the systems o the two
banks pending data transer.
CONSOLIDATION ON THE ANVILCan the acquisition be a precursor
or other big ticket mergers in the
banking sector?
According to Shah, the banking
industry in the country is witnessing
several structural challenges. On
the one hand there is tremendous
opportunity or growth, but managing
the growth is a challenge. Then thereare challenges in areas o eciencies,
technology deployment and capital
and risk management. The industry has
traditionally been a well regulated and this
has beneted the industry tremendously
in the context o systemic ailure seen
globally. Mergers and opening up o the
sector have not been the priority area or
the regulator till now as the ocus hitherto
had been more in terms o bringing in
structural changes in the light o the
economic developments and improving
the inherent systems. “However, with
the gradual waning o the global crisis as
well the growth trajectory o the Indian
economy, the stage has been set to bringin a new wave o reorms and this is likely
in upping the competitiveness o the
sector both by encouraging new players
as well as by allowing mergers among
existing entities. So, I eel we should brace
ourselves or more action,” he adds.
Diwanji is rather circumspect: “Well, I
oresee mergers o a dierent kind in our
system. I see, technology merging with
banking to oer nancial inclusion, a new
retail experience with branch presence
being selective and business being done
with the help o technology and paymentprocesses whether through internet,
kiosks, ATMs or POS machines. This would
change the ace o the banking sector. With
costs under pressure, RBI will ormulate
rules around shared inrastructure and we
will see emergence o white labeled ATMs
and Master Merchant acquirers o the size
o First Data emerge in India.”
“Apart rom that, o course there will be
consolidation in the banking sector with
new rules o bank licenses coming about
and the RBI being open to certain NBFCs
either tying up with banks or converting
into banks themselves,” he adds.Roy too oresees consolidation in the
sector. “Look at the State Bank o India
group. The merger is virtually over. The
various constituents o the group have
a common business strategy, a common
technology platorm,
common business
processes and so on. It
is just a matter o time
beore State Bank o India
as a unied entity is
ormed.”
NEED FORCONSOLIDATION
He queries whether
there is any need or
mergers in the case o
public sector banks. “In
eect, all these banks have
common ownerships,
they have almost common prole. Th
only dierence is the geographic spread
some inherent strengths and thei
respective sizes. Yes, in order to compet
in a global environment, size and volum
are important. However, size and volum
can also make them unwieldy. That even
behemoths can ail has been demonstrate
in the recent events. Again creating siz
and volume are not just sucient.
believe only transnational corporationcan become successul global operators.”
CONSOLIDATION FOR SIzEDiwanji stresses on the need or Indian
banks to globalize: “We are primaril
a rupee banking ranchise withou
much o oreign currency capability
For international growth, we need siz
and hence local level consolidation. W
need to be bigger (the only way is PSU
consolidation with proper integration
and not merely an arithmetic merger)
These merged entities should have locabalance sheet size to be able to set up o
buy oreign currency capabilities. I woul
like to see SBI merge all its subsidiaries an
then acquire large local banks oversea
to develop capabilities in respectiv
currencies. A good sign o gaining size an
multi currency capability would be when
Indian banks would be able to und Indi
Inc’s overseas acquisition plans.”
Shah analyzes rom a dieren
perspective: “Let us look at th
consolidation issue considering ou
industry structure. Firstly, with the to
ve banks accounting or over 40% o thbanking assets, industry concentration i
relatively high in our country as compare
to developed countries where it tends t
be much lower at around 15% to 20%
Secondly, rom a growth perspective
banking assets have been growing at
CAGR o 20-25% over the last ve years
implying that there is enough scop
or players to grow organically ove
acquisition and consolidation. Financia
inclusion agenda o the government als
ensures that most players are betting on
domestic growth. Thirdly, most o thgrowth has been domestic. The share o
revenues rom international operation
or Indian banks has been less than 10%
Fourthly and lastly, consider the ownershi
structure. Nearly one third o bank capita
is owned by a single shareholder, that is
the government o India.”
The move by the government t
Robin Roy feels
in any merger
the results will
largely dependon the dynamics
of business,
the correct due
diligence followed,
anticipated growth
and possibly aglobal footprint
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