Profitable Acquisition
ICICI Bank’s
decision to
I t fixes very well in our strategy. It gives us 463
new branches, which is a 25% increase in the
number of branches, specifically in north and western
India. We can garner new business through these
acquire Bank of
branches. These were the assertive, confident
Rajasthan at a words of Chanda Kochhar, managing director
and CEO of ICICI Bank, when she addressed
comparatively
the press in the wake of the bank’s decision to
high cost has acquire Bank of Rajasthan. She went on to say
that an acquisition must be ‘The right fit, at the
come in for some right price’.
flak. But some Such optimism notwithstanding, skeptics
wonder whether the strategic and underlying
banking experts value justifies the deal or whether Bank of
see value for the Rajasthan will fit the bill. There are concerns
over the share swap ratio, which many analysts
bank and perhaps consider as high, over the financial health of
an indication of Bank of Rajasthan and over its loan portfolio.
However, there are banking analysts who are
things to come. optimistic, who say ICICI Bank acted proactively,
Executive editor and who are emphatic that it is a right step toward
consolidation in the sector. They talk about the
N. Mohan meets benefits of the reach that the 463 branches of
Bank of Rajasthan will bring in, of a higher CASA
three leading
and NIM and of a good SME book that will add to
experts and the existing portfolio.
reports on their swap ratio
observations: At today’s pricing, the swap ratio has valued
Bank of Rajasthan at Rs 2,833 crore, says Abizer
Diwanji, executive director, corporate finance &
head - Financial Services of consulting firm 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.
Chanda Kochhar
visualizes an
acquisition to be
‘the right fit, at
the right price’
34 BANKING FRONTIERS J U LY 2 0 1 0
The lower value per branch of Bank of Rajasthan
is mainly due to underutilization as a result of
a variety of regulatory and management related
issues. Accordingly, ICICI Bank would need to
just make 49 branches work as efficiently as itself
to not dilute its efficiency ratios. Integration is
key to this as has been proved in past mergers like
Bank of Madura and Sangli Bank,” adds Diwanji.
He says an initial assessment of the banking
opportunity in Rajasthan and with certain of
Bank of Rajasthan’s clients and projects do
indicate a good potential given the fact 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 2000
odd branches and getting 463 scaled branches
at a go is certainly a good value proposition and
the pricing seems accretive.
REDUCES TIME TO MARKET
Monish Shah, director, Deloitte Touche
Tohmatsu India, tends to concur. He says in
terms of branch network, ICICI Bank would
expand by 23% with addition of the 463 Bank
of Rajasthan branches to its existing 2000 plus
branches. “ICICI Bank has set up around 400
branches in a year on an average for the last
three years. So an acquisition of 463 branches
reduces its time to market by a year to set it
up and maybe around two more years for 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 further 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 from Bank of Rajasthan’s book,
it seems to have added two other parameters -
the value which it can extract from increasing
the efficiencies of Bank of Rajasthan as well as
the premium it would want to pay to avoid a
competitor acquiring the bank and gaining scale
advantages.”
BRANCHES ARE IMPORTANT
Yet another banking sector analyst
says branch network is indeed one of the
important parameters in any acquisition in
the sector. Says Robin Roy, associate director,
PricewaterhouseCoopers: “The correct
valuation of any bank can be made based
on several parameters, the number of
established branches being one of them.
For a country like India with its geographic
vastness, banks can cater to the needs of
its customers only with a good mix of
online and offline channels. Being a keen
watcher of the banking scenario in the
country from a traditional perspective, I
will give emphasis to branches as quite
a chunk of the banking customers today
would prefer to have personal interactions.
Roughly the cost of setting up a branch is
around Rs 5 crore to Rs 6 crore and the
whole process of making the branch fully
functional and productive is estimated to
take years. So, in this light, the acquisition
of Bank of Rajasthan is of considerable
gain for ICICI Bank. Mind you as much as
60% of the 463 established branches are
in Rajasthan.”
Roy says through its earlier
acquisitions - Bank of Madura and Sangli
Bank - the bank has been able to expand
its network in the southern and western
part of 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 of Deloitte too says the two
earlier acquisitions (350 branches of Bank
of Madura and 200 branches of 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 of
Bank of Rajasthan in Rajasthan and other
northern territories,” says he.
RRB IN ITS FOLD?
He also points out another possible gain
for the bank: “Along with the branches of
Bank of Rajasthan, ICICI Bank may also
gain control of 58 branches of the regional
rural bank sponsored by the former, the
Mewar Aanchalik Gramin Bank, subject
to the approval of the Reserve Bank of
India. This RRB has branches in Udaipur,
Rajsamand and Pratapgarh districts of
the state, which would help ICICI Bank
to further its reach in tier - 2 cities. This
would be a deal sweetener.”
Roy takes it further. He says with the
RRB coming into its lap, ICICI Bank will
be the first private sector bank to have a
sponsored RRB. “However, the legalities of
this need to be looked into and perhaps
clearance from 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 merger
integration to
realize the latent
benefits in terms of
leveraging branch
network as well as corporate relationships.
Integration will be key to ensure that the
value envisioned at the time of the deal is
effectively 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 of business, the correct due
diligence followed, anticipated growth
and possibly a global footprint.”
Diwanji attempts to compare an
earlier merger. “Let us analyze the merger
of Centurion Bank of Punjab with HDFC
Bank on similar parameters. The swap
ratio was around 29 share of CBOP for
each share of HDFC. Consequently around
6.99 crore HDFC Bank shares were issued
valuing the bank at Rs 10,500 crore at the
then prevailing HDFC Bank price. This
works out to a per branch cost of approx Rs
27 crore (for all branches acquired). HDFC
Bank got a very good retail franchise, a
SME business and a two wheeler book
apart from the branches. These would
have helped the bank build a strong SME
business on the back of
the acquisition, which
has helped its branch
banking initiatives.”
NOT A REAL
COMPARISON
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
Monish Shah
describes the
acquistion as
preemptive, which
provides ICICI Bank a
dominant presence
in a growing
geography and
an opportunity to
further diversity
its books
of Centurion Bank of Punjab was in
February 2008 and Lord Krishna Bank
was in August 2007. It does not seem
appropriate to compare this value; more
so as the banking landscape has evolved
considerably in the last two years in the
backdrop of global recession, domestic
growth as well as evolving dynamics
in technology, products and customer
maturity. HDFC Bank acquired Centurion
Bank of Punjab at 15% discount to its then
market value while Bank of Rajasthan has
been acquired at 90% premium to its market
value. HDFC Bank’s acquisition was done
at Rs 23 crore per branch valuation, while
ICICI Bank has valued Bank of Rajasthan
branch at Rs 6.5 crore. However, there are
few key factors of differentiation between
the two deals, which should be considered
before making any comparison. CBOP
had much higher business per branch
(approximately Rs 90 crore) than Bank of
Rajasthan (approximately Rs 50 crore).
“HDFC at the time of acquisition
had a branch network of 754 branches
while CBOP had a well diversified branch
portfolio of 394. ICICI has a network of
1,900 branches and Bank of Rajasthan
network comprises 463. Hence, the
acquisition of CBOP was relatively more
BANKING FRONTIERS J U LY 2 0 1 0 35
 power with its corporate
Abizer Diwanji customers.”
contends that SME
businesses tend to STRENGTHENING
originate locally SME PORTFOLIO
and hence a local What do they think
presence with the impact of the
local staff would acquisition would be on
best be able to ICICI Bank’s corporate
identify SMEs banking and SME
that would be banking portfolios?
tomorrow’s MNCs Shah estimates the
loan book size of Bank
of Rajasthan at Rs 77
billion. Retail loans
synergetic for HDFC Bank at that time as constitute around
compared to the ICICI Bank’s acquisition. 10.8% of the total loan book, while the
Also market conditions in terms of rest is contributed by corporate and SME
investor confidence, India’s economic portfolios.
growth and global environment were “There is another aspect,” says he.
considerably different at the time of “Rajasthan’s economy has seen growth
the former acquisition, which was done at CAGR of ~10% over 2003-2009
before the full impact of the global predominantly coming from industrial
financial crisis was factored.” and service sector. This may remain
higher than the national average, as
CASA, NIM the state catches up with the rest of
What other benefits are seen in this the country. Sectors such as oil and
acquisition? Will it improve ICICI Bank’s minerals, textiles, software services and
CASA and NIM? handicraft have seen exponential growth
Diwanji says as part of buying scale, in the state. The merged entity with 293
CASA is a very important parameter. branches in the state is well positioned to
“The present acquisition would add the tap this opportunity. ICICI Bank would
Bank of Rajasthan deposit base of Rs bring in enhanced customer services and
15,900 crore to ICICI Bank’s franchise facilities as required by corporates and
and would be in line with its stated SMEs and it is poised to offer a variety of
intent of raising its deposits profile. Also, products now not available with Bank of
in a bank, the key to success is to convert Rajasthan.”
a liability base into an asset base,” he However, ICICI Bank will have to
elaborates. spend considerable time in capturing
Shah says the benefits of the this business opportunity by enhancing
acquisition would accrue to ICICI Bank service/product offering, training existing
over the medium term horizon. The employees (basically Bank of Rajasthan
northern region has the highest ratio employees), upgrading governance and
for CASA deposits to total deposits as improving business processes, so that it
compared to the rest of the country. can have a clear edge over other private
“Year 2009-10 has been phenomenal banks in the state, adds Shah.
for the bank with its CASA deposit ratio Diwanji interprets the scenario
rising from 28% to 42%. CASA deposit differently: “SME businesses tend to
ratio for Bank of Rajasthan stands at originate locally and hence a local
40%. Considering the size of its deposits presence with local staff would best
(which is 7.5% of ICICI Bank), it may be able to identify SMEs that would
not bring any significant change in be tomorrow’s MNCs. An acquisition
the composition of the deposits of the of local talent helps identify good
combined entity. However, going ahead, local SMEs. However, there would be
all depends on how well ICICI Bank challenges dealing with legacy SMEs in
capitalizes on the benefits of the merger. Bank of Rajasthan especially given that
Improvement in NIM will be a function some of them may not suit ICICI Bank’s
of CASA, overall lowering of borrowing credit lending philosophy. Also, given
costs as well as increasing bargaining the present delays in taking control,
36 BANKING FRONTIERS J U LY 2 0 1 0
there is a high possibility of accounts
deteriorating in performance.”
PEOPLE DISCONNECT
There could be compatibility in the
technology platforms that are being used
by the two banks as both of them are on
Finacle Core Banking System. However,
there is a disconnect as far as people who
man the systems are concerned. How
serious can this issue be?
Says Roy: “I am sure there has been
lot of due diligence done in the three
areas - technology, processes and people
- in addition to the commercial due
diligence. There will be some cultural
mismatch as far as people are concerned
and this is inevitable in any mergers.
However, through a gradual transition
process, this can be overcome. Mind
you in a tier 2 or tier 1 city, you may
not require tech savvy, market driven
personnel to do banking.”
Diwanji says similar technologies
ease the process of migrating information
significantly. However, people issues
are key. He points out: “In certain past
mergers, it was seen that the key to
success is not the price but integration.
Generally, employees of the merged
bank are used to legacy procedures and
hence may resist change. They would
live in a certain level of insecurity where
they may not be fully convinced of their
role in the merged entity and the risk
that their past performance could come
back to haunt them. This apprehension
is key to manage.”
merger expertise
Shah is of the view that the issues
are not atypical to any merger. He cites
how ICICI Bank has a history of building
the bank from scratch, successfully
integrating two mergers besides having
made substantial investments in its
people, technology and systems. In terms
of maturity of operations, ICICI Bank
would probably have far more evolved
systems of leveraging it to IT platforms
in terms of more robust processes as
well as customer analytics. But Bank of
Rajasthan has been one of the first old
private sector banks to move to CBS in
the early 2000s.
OPERATIONAL ISSUES
He adds that apart from technology
compatibility, the major issues that may
impact integration could be operational in the context of systemic failure seen
issues related to rationalization of branch globally. Mergers and opening up of the
network, reworking product portfolios, sector have not been the priority area for
mapping corporate customers and the regulator till now as the focus hitherto
integrating treasury operations. “The had been more in terms of bringing in
challenges are going to be in the areas of structural changes in the light of the
cost management, NPA management, risk economic developments and improving
management and governance. However, the inherent systems. “However, with
more than operational compatibility, the the gradual waning of the global crisis as
biggest challenge would be to manage HR well the growth trajectory of the Indian
compatibility. Cultural differences are going economy, the stage has been set to bring
to be there in a largely local old private in a new wave of reforms and this is likely
sector bank and a global bank. But the key in upping the competitiveness of the
will be to realize that the culture does play sector both by encouraging new players
its part in servicing the local clientele,” as well as by allowing mergers among
says Shah. existing entities. So, I feel we should brace
Diwanji sees rebranding and ourselves for more action,” he adds.
customer transition, both on the asset Diwanji is rather circumspect: “Well, I
and liability side, to be critical issues. He foresee mergers of a different kind in our
says communicating with customers as system. I see, technology merging with
to how they would be serviced by the banking to offer financial inclusion, a new
merged entity is key. A quick success is retail experience with branch presence
to make sure all channels of the merged being selective and business being done
entity open up almost immediately to the with the help of technology and payment
customer through a temporary technology processes whether through internet,
bridge between the systems of the two kiosks, ATMs or POS machines. This would
banks pending data transfer. change the face of the banking sector. With
costs under pressure, RBI will formulate
CONSOLIDATION ON THE ANVIL rules around shared infrastructure and we
Can the acquisition be a precursor will see emergence of white labeled ATMs
for other big ticket mergers in the and Master Merchant acquirers of the size
banking sector? of First Data emerge in India.”
According to Shah, the banking “Apart from that, of course there will be
industry in the country is witnessing consolidation in the banking sector with
several structural challenges. On new rules of bank licenses coming about
the one hand there is tremendous and the RBI being open to certain NBFCs
opportunity for growth, but managing either tying up with banks or converting
the growth is a challenge. Then there into banks themselves,” he adds.
are challenges in areas of efficiencies, Roy too foresees consolidation in the
technology deployment and capital sector. “Look at the State Bank of India
and risk management. The industry has group. The merger is virtually over. The
traditionally been a well regulated and this various constituents of the group have
has benefited the industry tremendously a common business strategy, a common
technology platform,
common business
processes and so on. It
Robin Roy feels is just a matter of time
in any merger before State Bank of India
the results will as a unified entity is
largely depend formed.”
on the dynamics
of business, Need for
the correct due consolidation
diligence followed, He queries whether
anticipated growth there is any need for
and possibly a mergers in the case of
global footprint public sector banks. “In
effect, all these banks have
common ownerships,
BANKING FRONTIERS
they have almost common profile. The
only difference is the geographic spread,
some inherent strengths and their
respective sizes. Yes, in order to compete
in a global environment, size and volume
are important. However, size and volume
can also make them unwieldy. That even
behemoths can fail has been demonstrated
in the recent events. Again creating size
and volume are not just sufficient. I
believe only transnational corporations
can become successful global operators.”
consolidation for size
Diwanji stresses on the need for Indian
banks to globalize: “We are primarily
a rupee banking franchise without
much of foreign currency capability.
For international growth, we need size
and hence local level consolidation. We
need to be bigger (the only way is PSU
consolidation with proper integration –
and not merely an arithmetic merger).
These merged entities should have local
balance sheet size to be able to set up or
buy foreign currency capabilities. I would
like to see SBI merge all its subsidiaries and
then acquire large local banks overseas
to develop capabilities in respective
currencies. A good sign of gaining size and
multi currency capability would be when
Indian banks would be able to fund India
Inc’s overseas acquisition plans.”
Shah analyzes from a different
perspective: “Let us look at the
consolidation issue considering our
industry structure. Firstly, with the top
five banks accounting for over 40% of the
banking assets, industry concentration is
relatively high in our country as compared
to developed countries where it tends to
be much lower at around 15% to 20%.
Secondly, from a growth perspective,
banking assets have been growing at a
CAGR of 20-25% over the last five years,
implying that there is enough scope
for players to grow organically over
acquisition and consolidation. Financial
inclusion agenda of the government also
ensures that most players are betting on
domestic growth. Thirdly, most of the
growth has been domestic. The share of
revenues from international operations
for Indian banks has been less than 10%.
Fourthly and lastly, consider the ownership
structure. Nearly one third of bank capital
is owned by a single shareholder, that is,
the government of India.”
The move by the government to
J U LY 2 0 1 0 37