Consolidation in Indian Banking
Analysts: Darpin Shah / Mayur Vani Tel : +91-22-4096 9742 / 4096 9721 E-mail: email@example.com / firstname.lastname@example.org
DOLAT CAPITAL Consolidation - need of the hour!!!!
The increased compliance requirements with the onset of Basel II have started a global spiral of consolidation. Indian banking sector too is expected to witness its own share of similar activites. A proactive regulator has already played its part in terms of laying a formal roadmap and guidelines to enable this migration. Indian Banks are preparing themselves for necessary re-alignmnets/ makeovers in the interim. The valuation matrices are soon expected to be weighed by the probabilities of individual bank participating in this activity. The cues from current deal premia in the regional consolidation experiences provide additional opportunities of value unlocking on eventual action...
Consolidation - A Global Phenomenon Banking sector consolidation is not just an Indian phenomenon but a Global reality on the back of Basel II implementations. As India integrates itself with the world – the increased adherence to global compliance standards will become a major tool for sustenance. Indian Banking Character- Unlike globaly, the Indian Banking system is characterized by large number of small banks participating in a large market. The top 5 banks cover around 45% of Assets in India, while globally they cover 75-95% assest. We feel that size will soon emerge as a strategic compulsion to remain competitive in the emerging opportunities from the Indian economic renaissance. Barring sparse instances, consolidation in Indian Banking industry till date has been undertaken primarily as an external compulsion than internal strategic initiative. Asian Experience - The Asian region (Malaysia, Taiwan, Singapore, Indonesia, South Korea and Japan), particularly after the 1997 South East Asian Crisis, has witnessed its own share of consolidation in the recent past. Further, recent M&A activity in the region has witnessed deal executions at 40%+ premia of prevailing valuations. The Indian Banking Industry is governed by a regulator with pedigree of taking proactive measures that facilitate integration of Indian Banking sector with emerging global trend. To facilitate timely entry of relevant global players in the banking space, RBI has set its roadmap for consolidation in two phases –
Phase I (2005-2009) – focused on enabling Indian Banks to become more competitive Phase II (post-2009) – providing competitive entry opportunities (Open branches and take over private banks) to foreign banks.
As we move closer to the 2009 deadline – both domestic as well as cross-border M&A activity is expected to gather further pace. We also expect some of the futuristic bank managements to take complementary overseas bets during this period. We also expect the activity to heighten further (post-2009) – given the strategic opportunity for the Global banks to participate in the Indian pie.
Till the actual action… Valuation segmentation – a natural transition Till 2009 - the strategic complements in business, contemporariness of the bank, and its relevance/ ability/willingness to participate in the activity, would start reflecting in valuation – thereby sharpening the valuation differentials further. At the Action – a decisive strategic premium… Adjusted for better growth opportunity, better regulatory compliances, adequate penetration of target assets and contemporary technology complements – we expect the stakes to change hands at premia of 40-50% of the then prevalent multiples.
How does one play this…
We expect SBI to be the natural beneficiary (among the PSB segment) – and a direct play given clarity on the end and means of its M&A related initiatives and preparedness. The new-age private banks with their wide/decent spread of network, diverse product offerings, and better technology and customer base – offer the best participation in this space for foreign banks. In this scenario, our top picks are ICICI Bank, Kotak Mahindra Bank, Centurion Bank of Punjab and YES Bank.
16 May, 2007 2
where-as world wide top 5 banks cover around 75-95% of the Assets. in India these Banks are classified as Public sector Banks.8 72.1% share in the Total Deposits and Advances respectively. as compared to the global peers – on the critical parameters of Business size and geographical reach.0 1. risk appetite of the economy for growth and its financial market structure. the 5th largest Bank in China is probably larger than the top five banks in Indian on the Total Asset front on aggregate basis. On the other hand. In comparison China’s 4th largest bank is 2. have mere 5. Further.minnows on Global scale
The size and structure of Banking system depends on stage of economic evolution. State Bank of India (SBI).6 7. The Indian Banking system is classified in three types i.1
14. Foreign Banks (so far restricted in terms of local aggression for the limited scope offered by law). the world largest Bank on the Tier I basis.0
80 70 60 50 40 30
FY2006 73. Regional Rural Banks (RRB) and Cooperative Banks and Special purpose rural Banks.0 82.0
20 10 0
Public Sector Banks
Size . Private Banks (Old Private sector Banks New Private sector Banks) and Foreign Banks. Market share in Indian Banking
90 80 70 60 (%) (%) 50 40 30 20 10 0 Public Sector Banks
Source: RBI. Indian Banking system is fragmented with top 5 banks covering around 45% of Assets. Dolat Research
FY1999 82.5 times that of SBI. India’s SBI is the only local bank that had made it to the top 25 list. both in rural as well as urban areas.e. Being a late participant in the global growth – Indian banks are in their early stage of growth and thus are minnows. Public Sector Banks (PSB) are still dominant in the business profiles of Indian banks. However. with around 28 of them controlling around 74% and 72% of the Total Deposits and Total Advances respectively. The Private Sector Banks (a dominant phenomenon post economic reforms) represent around 21% market share each in Total Deposits and Advances. SBI has around 90-100mn customers and an Asset Base of $155bn. 2007
. where as Bank of America has customer base of around 30mn and the Asset Base of more than trillion dollars.0 4. Schedule Commercial Banks (SCB). In Asia.000 banks in the world. The Indian Banking system is characterized by large number of small banks rather than a few banks participating in a large market.8 5. Commercial Banks are further divided into Schedule and non Schedule Commercial Banks. Also. the largest bank of India is around one-tenth the size of Citigroup.0
16 May. (Refer Annexure I ) Further.6% and 7.6 20.1
20. Only 22 of Indian Banks figure among the top 1.DOLAT CAPITAL
Indian Banking system – Fragmented structure
The Indian Banking System is well diversified and also has extensive banking network.
3 0.7 0.0 1.79 1. Industrial & Commercial Bank of China Bank of China National Australia Bank Kookmin Bank India SBI ICICI Bank PNB BoB Canara Bank Source: Industry 8 4 2 2 2 155 56 33 23 30 1.0 3.199 1.509 29.0 7.292 1.0 13.40 1.0 7.97 1.92 1.95 1.78 79 74 74 73 64 1.494 1.23 1.0 21.5 0.0 1.89 1.21 0. the statistics for Bank Credit to GDP (x).9 0.09 0.0 25.0 5.67 1.DOLAT CAPITAL
Tabel 1: -Banks in Different Categories
$Bn (March 2006) World Citigroup HSBC Holdings Bank of America JP Morgan Chase Mitsubishi UFJ Financial group Asia China Construction Bank Corp.16 36 32 31 17 12 568 800 587 299 181 7.02 0. clearly indicates that India is still an under-banked country. 2007
.0 12.14 1.502 1. Banks Credit / GDP (x)
Bank Credit / GDP (x) 249
156 133 113 76 25 35 47 77 94 113
Source: Industry. Dolat Research
16 May.85 Tier I Capital Assets Profits RoA (%)
Table 2: . Singapore government has also guided the banking system to lower the number of Banks to mere 3 players with DBS being supported to become a regional leader. Taiwan aims to bring down the number of state banks from 12 to 6 (FY2004). Similar initiatives have been undertaken in Indonesia. Retails Banks benefit from increased balance sheet flexibility Enhanced disclosure on risk and capital positions aids screening of targets and due diligence Regulatory capital changes will differ by country/ region.DOLAT CAPITAL
In Asian region. With the regulator sounding an early alert on preparing for this eventuality – Indian Banking sector can not remain aloof to the emerging trends on Consolidation and M&As. As India integrates with the world – the increased adherence to global compliance standards makes Capital Adequacy (to participate in growth – both in India as well as outside) a major tool for sustenance. South Korea and Japan – particularly after the 1997 South East Asian Crisis.Basel II impacts on M&A
M&A Factors Capital release Basel II impacts Acquires capital through IRB compliance to help fund purchase Unsophisticated banks facing increase in capital requirements under standardised approach could be acquired Portfolio mixes Targets identification Regional focus for expansion National barriers Source: Mercer Oliver Wyman (2003) Business Lines profitability shifts prompt shake-outs.
Consolidation – A Global phenomenon
Banking sector consolidation is not just an Indian phenomenon it is a Global Reality. Malaysia had reduced the number of banks from 55 to 10. Basel II is an attempt to bring semblance into the global banking environment to respond to the emerging challenges in terms of risk management to address increased “money-ness” of all assets globally and would remain key driver of global M&A activity (Table 2). 2007
. while. yielding a concentration of possible targets Basel II and IAS reduce international regulatory and accounting differences
The Banking sector reforms in India were initiated in 1992. the level of compliance of the sector with the Basel Committee’s Core Principles for Effective Banking Supervision. This makes mergers & acquisitions (both local as well as cross border) to form critical components of the evolution of the Indian financial sector. It also envisions a roadmap where Indian Banking system would witness emergence of a few national banks of global scale and a number of regional players.
The main objectives for consolidation are typically –
l l l l l l
Migration towards Universal Banking Model Gain Size – Balance Sheet/ Geographic Presence Increase Market Share – Assets/ Liabilities Acquire Skills/ Processes – New Opportunities Diversification – Business Diversification.DOLAT CAPITAL
Indian Banking Sector . While base business growth remains favorable for each constituent in the current economic environment – size of business (balance sheet) would remain a strategic compulsion to remain competitive in emerging opportunities from the Indian economic renaissance. prudential regulations. The idea was to prepare a robust financial structure that enables the economy to operate in an open world environment. efficient. to effectively absorb the new technologies and demand for sophisticated products and services. Banking Industry vision 2010 – a vision document of Indian Banks Association (IBA) has also highlighted consolidation and M&A activity as an immediate agenda – driven mainly by expectations of shareholders. has refined financial soundness and consistent supervisory practices of the Indian Banking system and made it resilient to absorb/respond global shocks. Risk Management To tap opportunities beyond regulatory restrictions
The major gains perceived from bank consolidation are the ability to withstand the pressures of emerging global competition. facilitate and also regulate developments that make consolidation an executable reality. Today. functionally diverse and competitive. While these initiatives on banking reforms have created a robust banking structure – it has also created a peculiar environment by creation of multiple similar entities – small in size competing to create their sizeable identity over the next few years. with a core focus on ensuring the safety and soundness of financial institutions and at the same time making the banking system strong. RBI has also on its part defined a clear roadmap recently to enable. to arrange funding for major development products in the realm of infrastructure and telecom. The roadmap is split in two phases–
Phase I (2005-2009) – focused on enabling Indian Banks to become more competitive (Refer Annexure II) Phase II (post-2009) – providing competitive entry opportunities to foreign banks (Refer Annexure III)
16 May. The reforms included measures for arresting the decline in productivity. efficiency and profitability of the Banking sector. It sets a vision to deliver 4-5 world class Indian banks by the year 2010. to strengthen the performance of the banks. All the key parameters like Capital Adequacy. and accounting and disclosure standards have been subjected to compliance of international standards since. etc which require huge financials outlays and to streamline human resources functions and skills in tune with the emerging competitive environment. 2007
etc). Yes Bank. With better technology and expertise in offering specialised banking products such as derivatives. BoI. strength and competitiveness of domestic Banks.Increased services and healthy competition Foreign Banks full-fledged entry is expected to transform the business of Indian banking in many ways. PNB. the share of foreign banks. BoB.) and are driven by ambition to create a sizeable banking entity (through organic as well as inorganic growth) Niche Old Private Sector Banks – boutique regional presence with decent growth focus (Federal. These are definite potential targets.
SBI offers maximum clarity on the structure and method of its evolution through this face to emerge as a larger participant in the system.) in this segment might re-align to any of the bigger umbrella from among the first layer. Public Sector Banks . Canara. The impact of the entry of Foreign Banks on domestic Banks is likely to depend on various factors such as the structure. DCB. Karnataka) – to align for strategic partnership options with a larger national player (foreign or domestic) Small Banks – Banks. BoM. Large Private Sector Banks – with contemporary management practices and high growth ambitions (ICICI Bank. The existing banks will get categorized in following six groups –
Revitalized Banking Entities – Banks like Indian Bank/ IDBI (which have been at the receipt of Govt funding/ largesse in the form rupee recapitalization/ favorable regulatory exemptions in the past) – would be allocated / acquire other banks to become strong with wider reach. etc. City Union. Vijaya. etc. Phase II (post 2009) RBI has highlighted following key regulatory changes for operative principals for Foreign banks operating in India post 2009
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According Full National Treatment of Wholly Owned Subsidiaries (WOS) of Foreign Banks Dilution of Stake in WOS Merger and Acquisition of any Private Sector Banks
Foreign Banks entry . The Tier II banks (like Dena. South India. Central.DOLAT CAPITAL
Phase I (Pre-2009) We expect following scenarios to evolve under these regulation during this phase. etc. Andhra.BUY SBI – for clarity on means and end Scenario II – Consolidation of Private Sector Banks Scenario III – Region Centric Private Banks – strategic partners
16 May. Kotak Mahindra Bank. who have been leading ex-bankers (CBoP. We foresee following scenarios to emerge – Scenario–I . and the regulatory/supervisory framework. trade finance. advisory services. HDFC Bank. UTI Bank) Niche New-Age Private Sector Banks – headed by aggressive CEOs. which would be reflected in terms of greater breadth of products. Karur Vysya.) that want to acquire bank with an overseas presence to become global entities.with large domestic presence (Tier I banks – like SBI. depth in delivery channels and efficiency in operations. etc. 2007
. the entry of foreign banks can enhance healthy competition and has a positive spillover effect on the domestic banks. which find organic growth restrictions with size and capital and would need to align with larger banks to remain viable (Dhanalakshmi.
Benefits for SBI and Group: . Private sector banks are expected to witness a spate of mergers.Currently. The gaps are narrower. Given their existing strong presence in their respective region and a legacy of relationships with subsequent brand equity – they are natural targets. consolidation remains an unclear vision for the Indian PSBs. delivery. Therefore in this segment is critical from several aspects. as we move to the Tier II Public Sector Banks. etc have displayed wherewithal and strategic vision to embrace changing competitive realities. PNB. products and services to cater the entire needs of customer. (Refer Annexure IV) We feel the value unlocking from consolidation opportunity in this segment is limited on account of lack of clarity on the roadmap and higher complexities (in terms of internal realignments within PSB units) – and hence should be explored from Value perspective as against consolidation perspective. However. vision. However. the desire being on the seller’s side to raise capital and also to support the regulatory norms. customer orientation (!). The likes of BoB. BoB and Andhra Bank in this space on pure valuation basis. over-lapping of branches. 2007 8
. the subsidiaries together form the 2nd largest banking entity on consolidated bases. we expect limited upside to happen in this segment of private banks. HDFC Bank. Kotak Mahindra Bank. India had its own-share of M&A over the last decade (Refer Table 3. and operational efficiency. New Private Sector Banks: .BUY SBI – for clarity on means and end SBI Clearly stands as a best bet amongst the PSB’s (on consolidation theme) on the back of the emerging clarity towards the consolidation/ merger with its seven banking subsidiaries (3 listed and 4 unlisted). (City Union Bank. and dispersed shareholding). IOB. The obvious participants would be banks which need a definite capital infusion. Annexure VI) Scenario III – Region Centric Private Banks – strategic partners When the name of the game to increase footprint – we feel there exists a niche space for the Old Regional Private Sector banks to join the party. these banks have also built strong / decent franchise. deliver similar pattern of performance. Barring these. maintaining culture. Other PSB’s – Play for Value Consolidation amongst the Public Sector Banks (PSB) . These Banks are expected to takeover / merger some of the weak and smaller banks along with some cross border acquisitions to enhance their core competency. the new age private banks (ICICI Bank. which include motives of value maximizations as well non-value maximization. The Government has kept the forum open for the Nationalized Banks towards Consolidation. and open offers post 2009 from global banks seeking complementary India Strategy.Post reforms in 1992.Government’s mercy As the name suggests – Public Sector Banks bear a legacy of being owned by government – and barring a few stray occasions. Further. which may determine the pace of consolidation. acquisitions. there is not much to separate one from the other – particularly on account of culture. We like PNB. the weaker and small banks are definite candidates for the consolidation on account of lower Networth and inability to face competition. due to the lack of initiatives from respective banks and also due to issues related to cultural mis-match. Balance Sheet to play the larger turf globally. having GoI holding at threshold limit (51%) and on stand-alone find themselves in a non-distinctive market position.Amongst the Indian Private Sector Banks.
16 May. However. (Refer Annexure V) Scenario II – Consolidation of Private Sector Banks Smaller Private Banks:. The banks however have compulsive strategic reasons that restrict them from a complete sell-out (issues like retaining identity. YES Bank.DOLAT CAPITAL
Scenario–I . The merger of these Banks with SBI would propel SBI to a newer orbit in terms of business. The proposed merger of Canara Bank and Dena bank has already sounded the bugle for the consolidation exercise. Dhanalakshmi etc). Policy measures such as government’s incentives that could accrue to the top managers are also important factors. there remains a possible outside trigger of substantial re-rating in this space if and when GoI decides to reduce its controlling stake to 33% from the current 51% levels. operations and brand equity. We expect the momentum to only build from hereon. technology implementation and also various other factors like human resource optimiz ation. CBoP etc) has captured a substantial share in the Indian Banking system.
However – they do possess a strategic relevance as channel partners/ strategic allies – which allow them to ride on their current channel strength and improve fee based incomes through partnerships (non-core business income for foreign banks). On the Business front. Sangli Banks 50% of the branches are located in the rural and semi urban area (Rural Business . mutual fund. Asset Base of over Rs 160bn. legacy corporate culture ICICI Bank paid higher valuation for the merger of Sangli Bank. Centurion Bank had strong foothold in West and South while Bank of Punjab had presence in North (highest CASA Deposit in the region) given a better senergy. ICICI Bank got direct access to existing 198 branch network of Sangli Bank (ICICI Bank did not receive new branch license for two quarters).107 Balance Sheet size:. product offerings and market aggression. We expect this to be the natural transgression given their pedigree on technology. Merged Entity to become 2nd largest Bank in India with Total Assets of about Rs 950bn.202lakh. Profitability to improve after the merger.next growth driver for ICICI Bank).Rs 9000cr Advantages from Infrastructure and also employee work culture Increased reach to 360 branches with BOMd’s 263 branches especially in Southern region. credit cards. The merger facilitated OBC in stepping up its technology drive. 95 branches.650. The merged Entity to have Assets worth Rs 800bn. Table 3: -M&A activity in India
Banks HDFC Bank and Times Bank Particulars Emerged as largest Private Bank in India Customer Base :.000 Branch Network:. Cultural Integration tough task for ICICI Bank. thus having size and strength to be comparable to big players. as IDBI bank’s portfolio of assets and liabilities also earn better.
ICICI Bank and Bank of Madura (BOMd)
Problem ICICI Bank and ICICI Ltd
OBC and GTB
Centurion Bank and Bank of Punjab
IDBI and IDBI Ltd
Problem ICICI Bank & Sangli Bank
16 May. GTB being a private sector bank had a strong existing IT platform with a centralized banking infrastructure in place. Strong nation wide franchise of 240 branches and extension counters and 386 ATM’s. GTB had a strong foothold in the Southern region where OBC had only 59 branches. It would also enable IDBI to reduce its cost of borrowing and lend infrastructure projects at a lower rate IDBI Public sector undertaking and IDBI Bank new age private sector bank . This could see the emergence of niche alliances in differential functional areas and business segments such as housing. insurance etc. 302 ATMs and nearly 1mn customers of IDBI bank will help IDBI to raise finances for its development finance activities.7mn ( 1.DOLAT CAPITAL
We feel that there exists very limited possibility to ride these banks from a sell out perspective. Centurion Bank had a strong Advances Portfolio where as Bank of Punjab had a strong CASA Deposits. comprehensive suite of products and services. Largest customer base of 2. GTB’s thrust on retail had given it wider access in the area of non-interest income OBC was relatively slow in its technology implementation plans. 396 branches and Extension counter of ICICI Bank / 140 reatil finance offices of ICICI To leverage on its large capital base. thus enabling ICICI Bank to offer its banking and finanical services and also cross sell products and services of ICICI group BOMd also had better technology. strong brand franchise and vast talent pool The strong corporate and retail relations to further help of fee based income and also other financial products The merger has helped OBC to widen its branch network by 104 branches. It had extensive corporate and retail customer relationships.integration problems. strong technology-enabled distribution architecture. with a high concentration of HNI customers having a propensity for saving. Sangli Bank added mere 2% to ICICI Banks Total Business. Merged entity to be 7th largest bank based on assets. BOMd had an attractive business per employee of Rs. But.2mn of BOMd). With this merger OBC also got ready access to around 1mn customers of GTB. 2007
expand business.DOLAT CAPITAL
Banks IDBI & UWB Particulars IDBI paid a decent value to acquire UWB. thus making it the 9th largest Private Sector Bank in India.
For details of Foreign Banks Exposure in India (Refer Anexure VII) If the foreign Banks opt to buy out private sector banks they would seek –
Radar Chart for The Prospective Acquirer
CBoP& Lord Krishna Bank (LKB)
Source : Dolat Research
Foreign Banks with global strategy to look for opportunityAlthough post 2009. customers and business.CASA
Mgmt Style . These Banks are expected to have two options to spread their reach. CBoP continued its inorganic growth strategy and paid fair value to acquire LKB. The strong branch network is expected to benefit IDBI to garner higher Retail Credit and also Low Cost Deposits (CASA) Portfolio. especially in Kerla. the foreign banks will be allowed to set up new branches and also to acquire Indian Private Banks. Foreign Banks having global presence strategy are expected to react in a different way depending on the level of presence in India. IDBI branch network reached to 425 branches with the acquisition of UWB’s 195 branches (70% of the branches in the urban areas).
Open newer branches and expand rapidly into newer areas. customer base viz. 2007
Internal View Degree of Integration of Channels Degree of Decentralisation Competence source & Impacts Management Policy Process & Structures Responsibilities Range of Products & Services Openness 10
. LKB also increases CBoP Balance Sheet size by around 20%.Grow th/Safe
Mgmt Style . LKB’s 112 branches and 44 ATMs extends around 50% geographic reach to CBoP. only few foreign Banks having global presence strategy are expected to aggressively take advantage of the reforms. Buy out any Private Bank and expand on the ready made branches.Credit
Source : Dolat Research
External View Consumer Beheviour Potential Brand Price Policy Service Customer Contact Core Products & Services Sales Channel 16 May.
Aggressive organic as well as inorganic growth strategy. appears to be one of the best listed plays on this theme. Universal Bank i. HDFC Bank HDFC Bank is 2nd largest private sector bank. 2007
. Consistent 30% earnings growth. Strong Management Team. Growing at around 80% in Business.
Having Presence Small size Tier II Banks Decent Branch netw rok Technology Estabilshed products Banks CBoP YES Bank Indusind Bank DCB
Not Having Presence Larger size Banks Strong Netw ork Superior Techonolgy Estabilished products Strong Retail Presence Banks ICICI Bank Kotak Bank HDFC Bank UTI
Regional Banks Federal Bank KTK SIB KVB
Source: Dolat Research
In this scenario the following Banks come into play
Banks ICICI Bank Particulars ICICI Bank is the largest Private sector Bank and 2nd largest bank in the country The Bank has largest retail assets base Universal Bank i. offering gamut of financial products and services.e.e. offering gamut of financial products and services Kotak Mahindra Bank Kotak’s commercial banking business. YES Bank New generation Bank with unique Banking strategy (knowledge banking). Strong Promoter group. DCB Source: Banks. Higher efficiency and high return ratios. Best NPA’s in the industry.DOLAT CAPITAL
Presence and Non Presence of Foreign Banks in India – what they look for. Further expected to continue the growth momentum for next couple of years. UTI Bank UTI Bank is one of fastest growing tech savvy bank Strong retail presence Superior return ratios CBoP CBoP is the fast growing new generation bank. to grow at much higher pace then industry given its small base. Dolat Research The new generation bank with the strong turn-around Story (Both Balance Sheet as well as Earnings)... Kotak. with its market leadership in broking and capital markets. Strategic mix helping the bank to have highest margin in industry. The Bank continues to focus on High Interest Margin business and expected to continue.
This makes India presence strategically crucial for every global financial conglomerate. along with Infrastructure projects. Standard Charted Bank (Pakistan) acquired 80. Subsequently. Banks’ Total Assets were $ 2009mn. Further – RBI to its credentials has enough history in terms of agility to respond to the emerging global business standards in banking – ahead of global timelines. had around 65 branches. The acquisition will boost Citigroup’s Taiwan-based assets to $22. Further PCB had 69branches and was the 19th largest bank in the Country. In the first three quarters of last year.e.8bn. the Foreign Banks are missing the crucial current growth momentum in the Indian Banking system. Union Bank was valued at 17.1bn ($ 426mn) or T$11. The acquisition made ABN as 2nd largest Foreign Bank in Pakistan and one of the top 10 banks in the country with Total Assets of PKR 124bn and around 80 branches.8bn or Eur 172mn (PKR 54/ share). Deposits to the tune of PKR 41bn or EUR 508mn. saving. Advances $1201mn and Net Assets $91mn.1x FY2005 earnings and 5. BOOC posted a net loss of T$510 million
Strategic Relavance of India for Global Bank Emerging economy in terms of spending. Valuation in those of buyers!!!
The valuations for the eventual transactions would be driven by the ultimate strategic premia that the buyers would be keen to pay for gaining access/ control in the Indian banking space.4% in Prime Commercial Bank (PCB) of Pakistan at PKR 13. making it the 13th largest bank on the island. PCB was valued at 4x its Book Value and represented around 42% premium over PCB’s average share price over last one year. Important peg of the future growth pie The strong corporate capex pipeline. Regulatory environment poised to complement the opportunity The Apex Bank i.Beauty lies in the eyes of beholder. investments and growth India is the 2nd fastest growing emerging Economy and also the fastest growing economies in the terms of spending.Developing Countries
ABN Amro Bank acquired 93. 37ATMs and 4 lac retail customers. makes Banking Credit growth to remain healthy above global averages. investments and growth.6x FY2006 Net Asset Value (Book Value) Citigroup to buy Taiwan’s Bank of Overseas Chinese (BOOC) for T$14.
How Much??? . saving. Union Bank was eight largest Bank in Pakistan by market share. where-in these Banks cannot expand their reach extensively during the Phase I (March 2005-2009).DOLAT CAPITAL
Global Banks M&A Scenario. Enough Available Options The well-dispersed diversified Indian Banking System provides large complementary offerings (options/ alternatives) to the Foreign Banks depending in terms of the presence. growing retail business with increased spending power.9% stake in Union Bank Limited (Pakistan) for $ 413mn. PCB had Total Assets of PKR 52bn or EUR 654mn.
16 May.8/share. need and business strategy. RBI has set norms for the Foreign Banks. 2007
Change in Government / Government Guidelines.4% 27%
Challenges in Consolidation Some of the major concerns or issues for the Consolidation in the Indian Banking could be:
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Adaptation of Technology or technology platforms. 2007
.8% 61. Culture.Premiums paid
Sr no 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Acquire Bank H&CB Overseas Union Bank DBS Bank Hong Kong Taipei Bank Chohung Bank Chohung Bank Chohung Bank Ufj Holdings inc Bank Nisp Pt Prudential Bank Equitable PCI Bank Bank Buana Indonesia Farners Bank of China Momji Holdings Inc Southern Bank Berhad Average Centurion Bank ICICI Bank HDFC Bank IDBI Average Combined Average Source : Bloomberg Target Bank kookim Bank United Overseas Bank Ltd DBS Group Holdings Ltd Fubon Financial Holding Co Shinhan Financial Group Ltd Shinhan Financial Group Ltd Shinhan Financial Group Ltd Mitsubishi UFJ Financial Overseas Chinese Banking Corp Bank of Philippine Islands Banco De Oro Universal Bank United Overseas Bank Ltd Taiwan Cooperative Bank Yamaguchi Bank Ltd Bumiputra Commerce Hldgs Bank of Punjab Bank of Madhura Times Bank United Western Bank Deal Premium 0.8% 20.3% -28.DOLAT CAPITAL
Table 5: -Global M&A activity .6% 15.1% 5.8% 5.1% 21.2% 0.9% 5.2% 26.
16 May.1% 95.0% 7.0% 33.6% 100.0% 8.2% 6.4% 46.2% 35.3% 4. working environment (Labor problems).0% 22.
6 29.0 3.2 4.4 23. In its peer-set .DOLAT CAPITAL
What Does This Mean To Bank Valuations…???
Till the actual action… Valuation Segmentation – a natural transition As we move closer to the 2009 deadline – both domestic as well as cross-border M&A activity is expected to gather further pace.5 18.6 3.6 88.3 2. We expect SBI to be the natural beneficiary (among the PSB segment) – and a direct play given clarity on the end and means of its M&A related initiatives and preparedness.5 18.7 47.4 2.2 3.5 36. The new-age private banks with their wide/decent spread of network.2 3.6 4.6 23.1 46.1 3.3 26.3 8.4 1.4 3.6 13.5 15.8 29.8 23.5 5.8 7.0 16.7 2.2 2.1 3.0 5. better regulatory compliances.8 6.7 20.2 3.0 40.2 8.2 1.034 919 175 552 106 541 164 FY07E 5.8 22.2 Net Profit FY09E FY07E FY08E FY09E 4.6 5.
How does one play this…
We expect the M&A activity to gain momentum sooner and heighten further as we approach the eventual 2009 deadline.4 16.2 0.1 21.9 3.9 1.5 17.7 1.value would remain a dominant investment theme along with a possible outside trigger of substantial re-rating in this space if and when GoI decides to reduce its controlling stake to 33% from the current 51% levels.2
16 May.6 4.9 15.3 22.5 1.2 22.3 8. adequate penetration of target assets and contemporary technology complements – we expect the stakes to change hands at premia of 40-50% of the prevalent multiples.9 62.2 19. We also expect some of the futuristic bank managements to take complementary overseas bets during this period.1 4.1 14.8 6.9 2.7 1.9 3.8 1.0 P/BV (x) FY08E 4.8 1.8 6.5 1.5 3.9 8.7 NII FY08E 7.3 26.7 6.1 9.7 33.1 4.1 1. contemporariness of the bank.
Private Banks Valuation
Banks Rs bn CBoP Federal Bank HDFC Bank ICICI Bank Karnataka Bank Kotak Mahinrda Bank South Indian Bank UTI Bank YES Bank Banks Rs bn CBoP Federal Bank HDFC Bank ICICI Bank Karnataka Bank Kotak Mahinrda Bank South Indian Bank UTI Bank YES Bank CMP as on 16/05/2007 CMP (Rs) 40 267 1.2 4.8 14.2 4.9 22.1 16.1 20.6 35. During this period.7 13.7 3.1 2.7 2.4 16.6 2.3 3. In this scenario.2 13.3 19.7 5. diverse product offerings.4 2.4 2.8 6.4 28.1 3.7 FY07E EPS (Rs) FY08E FY09E 1.8 30.6 4.0 1.8 7. We expect the momentum to also build in terms of valuation differentials with a further sharpening during this period towards the likely beneficiaries.5 0.9 4.8 17.5 2.0 16.4 2.7 3.6 3. At the Action – a decisive strategic premium… Adjusted for better growth opportunity.9 6.7 3.0 8.1 9.1 FY07E 4.8 45.5 51.0 2.0 1.8 66. vis-à-vis the ones where the chances for M&A/ consolidation are lower.6 11.0 9.3 21.3 4.7
FY07E 4.3 21.7 5.6 3.5 4.9 5.6 4.6 3.2 46.1 18.1
RoANW (%) FY08E FY09E 10.4 19.0 4.5 3.4 1.5 33.6 0.6 4.5 2.0 3.6 4.3 1.1 17. and better technology and customer base – offer the best participation in this space.4 2.4 4.4 113.5 21. would start reflecting in valuation – thereby sharpening the valuation differentials further.6 10.5 1. Centurion Bank of Punjab and YES Bank.6 20.9 22.4 3.2 1.7 1.3 13. the strategic complements in business.2 36.7 7.6
P/ABV (x) FY09E FY07E FY08E FY09E 3.7 P/E (x) FY08E 40.8 3.4 2.8 15.4 6.1 3.6 4.0 1.6 1.0 6.9 36.7 19.2 17.6 FY09E 10.6 16.5 3.3 4.6 4.5
FY07E 52.1 15.7 17.6 4.3 10.9
10.9 1.8 3.9
FY09E 27.4 43.4 57.0 3.8 18.8 15.2 21.6 10.8 19.3 3.1 3.0 1.0 36.8 58.8 28.6 0.9
0. and its relevance/ ability/ willingness to participate in the activity. Kotak Mahindra Bank.0 4.1 1. our top picks are ICICI Bank.0 3.6 1. 2007
.5 NIM (%) FY08E 4.9 25.6 20.3 17.
Structure of Indian Banking system
Scheduled banks in India
Scheduled commercial banks
Scheduled co-operative banks
Public sector bank
Private sector bank
Foreign sector bank
Regional rural bank
Scheduled urban co-operative banks
Scheduled state co-operative banks
Old Private sector bank
New Private sector bank
State Bank & its Associates
Source : Banknet India
Annexure II RBI’s Roadmap for foreign banks in India The banking sector in India is robust and its standards are broadly in conformity with international standards. following the one-mode presence criterion. In further enhancing its efficiency and stability to the best global standards a two. 2.
16 May. it is proposed to go beyond the existing WTO commitment of 12 branches in a year.track and gradualist approach will be adopted. 2007
. Existing banks. One track is consolidation of the domestic banking system in both public and private sectors. Implementation of the policy decisions is as follows: Phase1: (March 2005 to March 2009) 1. The number of branches permitted each year has already been higher than the WTO commitments. A more liberal policy for under-banked areas will be followed. 3. The second track is gradual enhancement of the presence of foreign banks in a synchronized manner. Conversion of existing branches to wholly owned subsidiaries In the first phase. foreign banks already operating in India will be allowed to convert their existing branches to WOS while following the one-made presence criterion The WOS will be treated on par with the existing branches of foreign banks for branch expansion in India. New Banks –First time presence Foreign banks wishing to establish presence in India for the first time could either choose to operate through branch presence or set up a 100% wholly owned subsidiary (WOS).Branch expansion policy For new and existing foreign banks.
the WOS of foreign banks on completion of a minimum prescribed period of operation will be allowed to list and dilute their stake so that at least 26% stake of the paid up capital of the subsidiary is held by resident Indians at all times.23 51. initially entry of foreign banks will be permitted only if private sector banks that are identified by RBI for restructuring.56 12.85 12.77 73.73* 66. Annexure IV: .00 61. RBI will take into account the standing and the reputation of the foreign bank.14 13. Annexure III Phase II: April 2009 1.80 11. Where such acquisition is by a foreign bank already having a presence in India. The dilution may be either way of IPO or as an offer to sale.33 11.50 12. globally as well as in India.52 11. to enter into M&A transactions with any private sector bank in India subject to the overall investment limit of 74%.51 12.17 57.47 74.90 12.98 55.80 11. RBI may.43 53. 2007
.19 52.23 51. for acquisition of 5% or more in the private bank.34 11.09 57.Government holding in the PSB and CAR(%)
Bank Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Mah. Dilution of stake in WSO In this phase. and the desired level and the nature of presence of the foreign bank in India. foreign banks may be permitted. Canara Bank Corporation Bank Dena Bank IDBI Indian Bank Indian Overseas Oriental Bank Punjab National Bank State Bank of India* Syndicate Bank UCO Bank Union Bank of India Vijaya Bank *.21
16 May. According Full National Treatment to WSO of foreign Banks In the second phase removal of limitations on the operations of the WOS and treating them on par with domestic banks to the extent appropriate will be designed and implemented after reviewing the experience with phase 1 and after due consultations with all stakeholders in the banking sector. M&A of any Private Sector Bank in India In the second phase. if it is satisfied that such investment by the foreign bank concerned will be in the long term interest of all the stakeholders in the invested bank.74 11.52 13.27 12.55 53. permit acquisition of such percentage as it may deem fit. after a review is made with regard to the extent of penetration of foreign investment in Indian banks and functioning of foreign banks. Acquisition of Shareholding in select Indian Private Sector Banks In order to allow Indian banks sufficient time to prepare themselves for global competition.06 13.76 11. subject to regulatory approvals and such conditions as may be prescribed.71 80.RBI Holding Government holding 55.87 CAR (%) 12. The RBI may also specify. In such banks.DOLAT CAPITAL
4. if necessary.81 69. 3. 2. that investor bank shall make a minimum acquisition of 15% or more and may also specify the time frame for such acquisition. The over all limit of 74% will be applicable. In considering an application made by foreign bank.47 76. foreign banks would be allowed to acquire a controlling stake in a phased manner. a time bound plan covering a period not exceeding six months to conform to the ‘one form of presence’ concept will have to be submitted by the foreign bank along with the application for acquisition.80 59.17 51.73 14.
1 1.6 117.9 14.0
11.9 1.9 27.8 298.8 21.4 6.2 1.8 103.1 1.8 15.8
22.2 15.2 1.2 140.6 18.0 0.1 125. (Rs) P/BV (x) P/ABV (x) RoANW (x)
Annexure V: .V.5 11.1 18.0 6.1 1.7
16.0 7.2 262.4 1.4 1.9 1.4 7.2 392.9 1.7 18.0 298.1 1.9 9.7 15.2 1.0 17.0
27.2 596.8 18.3 15.5 92.9
1.2 1.2 1.1
Bank of India
23.0 1.9 7.0 18.0 3.4 11.8
32.2 1.7 0.6 84.6 22.8 7.9 0.9 1.5 14.2 16.2 1.9 1.0 0.9 1.5 64.1
Bank of Baroda
44.4 7.3 17.6
CMP as on 16/05/2007
.0 11.4 339.3 201.3 1.8 6.4 6.3 76.9 8.4 1.9 1.0 6.8 2.2 5.1 1.6 15.3 235.7 18.1 1.0 0.2
50.1 17.4 18.9 0.6 1.7 1.2 118.5 74.1 678.6 12.3 9.7
12.6 18.6 15.4 5.6 1.1 FY08E FY09E FY07E FY08E FY09E FY07E FY08E FY09E FY07E FY08E FY09E FY07E FY08E FY09E 21.8 776.7 145.6 340. 2007
P/E (x) FY07E 4.6 268.2 9.5 24.9 15.2 1.7 0.4 135.4 5.0 14.3 1.1 0.6
49.0 0.7 174.2 1.4 13.2 0.8 9.5 1.2 1.3
27.2 1.5 21.7 11.0 8.6 1.3
15.9 77.1 0.9 1.5
39.8 0.2 1.1 B.0 0.8 19.9 1.2 4.6 0.4 1.0 6.7 1.4 26.9 8.2 1.9 1.6 18.3 16.9 1.284
35.6 3.6 1.4 1.0 100.4 1.9 6.2 1.0 12.1
43.2 0.Public Banks Valuation
22.1 1.2 6.4 94.1 98.3 6.5 113.4 102.4 23.16 May.3
99.6 232.3 1.0 7.3 121.6 2.1 4.9 1.7
19.7 1.3 1.
122.860.437.2 235.571.3 1.58 13.126.DOLAT CAPITAL
Annexure VI: .055.742.4 330.2
16 May.2 15.254.062.3 1.24 15.9 374.1 10.0 112 30.400.0 15.12 14.05 1.5 17.6 2.60 9.445.0)
Annexure VII : Foreign Banks in India
FY2006 (Rs mn) Capital Deposits Advances Total Assets Networth PAT RoA (%) RoAA (%) RoNW (%) RoANW (%) Source: RBI.6 36.5 1.9 Stan Chart 5.6 HSBC 13.950.6 279.9 15.03 1.5 104.5 249.5 791.5 Deutsche 7.4 12. 2007
.0 2.2 Bank of America 6.7 14.12 19.9 1.000.0 146.13 944.0 200.282.7 60.732.730.0 230 6.3 36.927.552.502. C-line.437.5 7.78 16.799.0 21.5 2.40 2.592.80 31.5 41.637.2 1.2 1.149. Dolat Research Citi Bank 5.8 454.88 2.3 21.13 9.113.5 1.8 15.048.6 UWB 1.17 537.1 ABN Amro 1.0 2.598.37 1.6) (1.690.955.9 2.10 9.259.677.817.631.885.1 5.013.3 481.981.0 28.12 9.0 35.767.4 1.551.7 150.690.9 (27. Dolat Capital Sangli Bank 3.500.Banks.997.0 LKB 3.8 120.9 13.1 33.416.Valuation table for the recent mergers and acquisitions
Particulars Price Paid (Rs mn) Branches Price / Branch (Rs mn) Networth Net NPAs Effective Price Total Business Total Business / Branch (Rs mn) Effective Price / Branch (Rs mn) Total Business / Effective Price Equity (Rs mn) BV (Rs) Price / Share P/BV (x) Adj BV (Rs) P/ABV (x) Total Business as on 31st March 2006 Effective Price = Price Paid -Networth + NPA Source:.21 16.50 9.0 198 15.0 2.824.6 39.84 23.9 78.0 676.8 13.7 27.1 3.0 455.8 1.4 940.0 284.920.9 9.117.2 118.0 45616.55 1.1 168.1 240.2 250.7 59.0 25.0 2.273.1 14.82 19.4 244.8 43.
If motive is undervaluation. because of economies of scale Synergy Lower Taxes. you should be willing to pay up to the synergy. Financing Policy: Move to be a better financing structure Dividend Policy : Return unsused cash Practically. Should You pay? Which firm is indispensable for the synergy? If It is the target. you should not. because of tax benefits: Tax synergy Lower cost of debt: Financing synergy Higher debt ratio because of lower risk: Debt capacity Subtract the value of the target firm (with control premium) + Value of the bidding firm (pre. Do a full fledged corporate financial analysis
If motive is control or in a stand alone valuation. 1. Look at industry averages for optimal ( if lazy) 2.DOLAT CAPITAL
Annexure VIII: . financing and dividend policy will be altered: Investment Policy: Higher returns on projects and divesting Control Premium unproductive projects. If it is the bidder.acquisition).
Value the company as if optimally managed. 2007
. This will usually mean that investment. This may include A higher growth rate in revenues: Growth synergy Higher Margins.Valuing an Acquisition
Component Valuation Guidelines Value the combined firm with synergy built in. with existing inputs for investments. financing and dividend policy. This is the value of the synergy. this is the maximum you should pay
Source: Damodaran on valuation
16 May. this is the maximum you should pay
Status quo Valuation
Value the company as is.
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