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HDFC BANK & CMoP Merger 2008 ± A case study
(Source : ICFAI Analyst Apr 2008)
In February, HDFC, which is India's second largest private bank after ICICI, sealed the largest ever merger in Indian financial history with CBoP for Rs 9,510 cr. This has set up a new trend because, earlier, bank mergers in India were largely bailouts, with the stronger bank swallowing the weaker one, or reverse mergers to develop a new business model such as that of ICICIs and IDBIs. However, in this case, at the time of the merger, both the banks were healthy and so it can't be dubbed as a 'merger of unequals' or a larger bank completely gobbling up a smaller or weaker one; rather it is akin to a 'merger of strength'. However, given the post-2009 scenario, when foreign banks are likely to be on a par with the domestic banks, despite some regulatory hitches,
CBoP is also no stranger to mergers. and both of them had sipped merger waters beforehand. ICICI. . as private sector rivals (ICICI and Axis Bank) have upped the ante and foreign banks such as Stanchart. In fact. CBoP took over Kochi-based Lord Krishna Bank. it began its existence as Centurion Bank. And. aggressive. Coleman & Co. and last year. another new age. private sector bank. In fact. the Centurion Bank had merged with the North India-based Bank of Punjab. HDFC Bank had orchestrated the first merger in private sector banking by taking over the troubled Times Bank from media giant Bennett. had made significant inroads through a string of acquisitions and reverse merger moves.the merger of two strong banks heralds a new era of consolidation in the Indian banking industry as a whole. in 1999. Flashback Both these new generation banks were incorporated and licensed by the Reserve Bank of India (RBI) in the post-liberalization era of the mid-1990s. In 2005. Nationalized banks have also started shedding layers of fat. in between. Citibank and HSBC have widened their reach to cash in on the opportunities thrown open by the Indian banking sector.
Bank of Punjab and Lord Krishna Bank²thereby managing to reduce the gap with its big rivals.But. Associate Director. HDFC waited like a hawk till the right opportunity came along.358 ATMs. Again. In HDFC Bank. but it would be far bigger than Axis Bank. processes and technology. Centurion Bank. in fact. in the pecking order. HDFC Bank is. integration is primarily at three levels² people. Pricewater houseCoopers (PwC). In this HDFC-CBoP . the merged entity would still be two-fifth the size of the country's second largest lender ICICI Bank. financial services. the third largest private sector bank in India. And now. with this strategic master stroke. it will be the largest in terms of branches in the private sector. HDFC Bank will enjoy an asset base of more than Rs. there are certain standard technology and people issues. "in any merger.50. However.148 branches and 2. And.1. will move to 7th position from the pre-merger position of 10th.'' opines Robin Roy.000 cr and. there is no union. With a distribution network of 1. whereas CBoP has a workers' union inherited from Lord Krishna Bank. swallowing four banks in all²Times Bank. Post-merger.
That's where CBoP may come in handy. It has already acquired a license for a branch in Bahrain. The bank is already present in Canada. Now it is present in 18 countries.´ Next stop: Overseas Rival ICICI Bank has already initiated its foreign odyssey. The management styles of both the banks are more or less similar. ³The merged entity will definitely have to yank for operational efficiencies in its lines of business. both understand consumer and retail banking business. It is also planning to raise $1 bn through a mediumterm note issuance program. boasts of having three international branches in Singapore. what . and moreover. Axis Bank. Moreover. Hong Kong and Dubai and a representative office in Shanghai. In fact clear-cut synergies exist. positives outweigh the negatives. the third-largest private sector bank. and so there are no data-related legacy issues. which will be opened very soon. and its overseas operations accounted for around 23% of the consolidated banking assets as on December 31.merger. 2007. From day one both have been on a technology platform. This might have swayed HDFC Bank's thinking. and it is expected that change-management issues will be handled smoothly.
going forward. like good processing. he's got a lot of experience on this and we would examine it. it would not definitely be an overcrowded market but probably somewhere in Eastern Europe. on its board² who. but let's see. Indonesia or the rest of Asia. and we want to participate in trade (India-specific export-import-related) finance. through Sabre Capital. has gained immense experience in international banking as well as in M&A activities. So.could be of immense help to the bank. the former CEO of Standard Chartered Bank. We are not about to challenge the Citigroups of the world. Is there something hot? No. We want to provide a global range of products for NonResident Indians (NRIs). HDFC would seriously check where the bank's strengths and benefits. "But we have something very specific in mind. HDFC Bank MD Aditya Puri has commented." He further added that the bank is not looking at the crowded western markets. I think with Rana Talwar coming on board. in its international foray is the presence of Rana Talwar. Post-merger challenges . "We could." Puri has further said. a fund which he has spearheaded along with other partners. On the issue of overseas expansion. good credit skills and good distributions. We are not talking about becoming a big bank abroad at this point of time. come into play.
Although this merger is the largest of its kind in the history of Indian banking. 2007. Moreover. it has 425 in the pipeline. Although ICICI had 955 branches as on the date of merger. it is anticipated that there will be a dilution of profits. So post mid-2008." comments a PwC source. The merged entity will definitely have to yank for operational efficiencies in its lines of business. The source further adds. Moreover. "The challenge could be that CBoP is more about low-cost operations and distributes more low-cost products while HDFC's products are more universal and sophisticated and higher up the value chain. HDFC Bank had considered branch network as an important parameter and savored the moment of surpassing its nearest competitor ICICI Bank in terms of number of branches. the ICICI Bank would be the largest private sector bank in terms of branch network also. it is not free from loopholes. as usual. which are in the process of implementation by mid-2008." At the time of finalizing the deal. on the basis of pro forma consolidation as on December 31. "How well the CBoP team gels with HDFC products could be an area of challenge. the gross Non-Performing Asset (NPA) of the merged bank would be higher than current gross NPA asset of . at least in the short-term.
the bank shifted to Finacle. The erstwhile Centurion Bank was on Misys.3 3. So CBoP is still in the process of How They Piled Up HDFC CBoP Net Profit 1.439 Net Interest 4. as Lord Krishna Bank was on (and partly still remains) i-flex. is currently on two different technology platforms² Finacle and i-flex.119 118 Advances 71.31. And the 2006 merger with Lord Krishna Bank had further complicated things.HDFC Bank. The integration of technology and people would be a serious challenge as well as a sensitive issue.386 Deposits 99. by virtue of its acquisitions of Bank of Punjab and Lord Krishna Bank. Also. the proportion of Current and Savings Account (CASA) for the merged entity is likely to go a little lower than the current CASA for HDFC Bank.386 Total 1. given CBoP's comparatively weak resource profile. Centurion Bank of Punjab. but after taking over Bank of Punjab.6 .
2007.ATMs (%) (As on December 31. Figures in Rs Cr) Source: Respective Banks .
Besides this. Post-merger distribution deal between Aviva Life Insurance and ICICI Lombard will be scrapped because as per the existing law of the Insurance Regulatory and . Centurion Bank is the bancassurance partner for these two insurers. Given these circumstances. Moreover. the rating agency Crisil believes that the benefits accruing from access to a larger branch network and wider geographical coverage will more than offset the negative impact of a slightly weakened asset quality and other integration snags in the short-term. (Bancassurance is the sale of life. Whatsoever. the merger of CBoP with HDFC Bank will be a big blow to their bancassurance partners. bringing the banks onto a single platform will take considerable time and resources.bringing all its branches on to the Finacle platform. and the banks will also have to ensure that customers do not become disgruntled. the entry of HDFC Bank which works on i-flex platform will further complicate the situation. pension and investment products through the branch network of a bank. while HDFC Bank sells insurance for group company HDFC Standard Life.) This merger will adversely impact the business of Aviva Life Insurance and ICICI Lombard General Insurance Co.
CBoP also has a strong presence in home loans. Cut-throat competition and RBI's stingy branch licensing policy mean that the scale and geographical reach have become critical for the survival of the bank. Now the merged entity may not sell home loans as this may lead to conflict of interests with HDFC Ltd. banks will manage the costs better and enjoy economies of scale. Emerging trends This HDFC-CBoP merger is a precursor to what lies ahead in the post-2009 scenario when the banking sector will be opened up. Through merger. it is most likely that it would be able to tackle the post-merger challenges and optimize the synergies.Development Authority (IRDA). the merger may lead to a clash with HDFC Ltd. But given the phenomenal progress HDFC Bank has made in recent times through its technology-driven and customer-centric business model. which provides home loans to customers and has a large customer base in this segment.. . Moreover. retail lending will also get a boost. Moreover. So it is better to grow inorganically rather than through slow organic process. intertwined with smart and dedicated workforce and able leadership. a bank can't sell products for more than one insurance company.
The new-age private banks. The foreign banks which are operating in India see themselves more as predators in the M&A game and are not willing to be a target of acquisition by domestic banks. though did not grow much. But these PSBs suffer from political and institutional compulsions that come in the way of the merging of these banks despite having distinct operational synergies. both old and newly licensed. the truth is that except for those negotiated by the RBI. So the only private sector banks. M&As in the Indian banking sector have been few and far between. have every reason to be optimistic and so would be looking for acquisition rather than being the target of one. Unless their operations suffer a dramatic downturn. are left for acquisition target. But the trigger should come from the governmentowned Public Sector Banks (PSBs). the older private sector banks. which successfully battled their turbulent initial days. though not quite occupying the 'commanding heights' once envisioned for them. These PSBs. including the banks in financial trouble. . they are unlikely to offer themselves as prospective candidates for acquisition. Finally. still are in a position of some strength to initiate consolidation moves. have a history of independent operations.But despite the discernible synergies.
the banking sector is witnessing a general slump on all important parameters of profitability. which are small compared to their overseas counterparts. etc. In fact. are likely to go for consolidation given the fact that post-2009 foreign banks are likely to enjoy greater operational freedom in the Indian market. So the basic instinct of survival will keep the consolidation activities ticking in the Indian banking sector. with increased competition. such as return on assets. Moreover. And the present merger of two healthy banks shows that none can stop the inevitable. the Indian banks. profit per employee. This underscores the need for bringing cost-efficiencies and opening up new revenue streams that only size can confer. .This is not to say that there will be no consolidation in the future.