8/8/2019 Profitable Acquisition

http://slidepdf.com/reader/full/profitable-acquisition 1/4

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 

8/8/2019 Profitable Acquisition

http://slidepdf.com/reader/full/profitable-acquisition 2/4

  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

8/8/2019 Profitable Acquisition

http://slidepdf.com/reader/full/profitable-acquisition 3/4

8/8/2019 Profitable Acquisition

http://slidepdf.com/reader/full/profitable-acquisition 4/4

  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