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  • 7/27/2019 IDBI Merger

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    IDBI-United Western Bank mergerAdvantage, branch and rural roots

    Radhika Kamath

    IDBI: BUYUWB: ACCEPT

    Expand retail presenceDiversify credit profile

    Improved deposit mix

    The amalgamation of United Western Bank (UWB) with Industrial Development Bank of India is likely

    to change the rules of the game in the banking space on the issue of valuation of shares.

    The merger is markedly different from takeover of Global Trust Bank and Nedungadi Bank by

    healthier rivals. In both the cases, shareholders went away without any consideration for the sharessurrendered.

    Apart from synergies to the participating banks, the IDBI-UWB merger is likely to be a positive forold private sector banks.

    As the wave of consolidation is likely to gather momentum over the next year or so, old privatesector banks may see their valuations improve.

    Investment in the IDBI stock can be considered with a long-term perspective.

    The stock is available at a price-to-book multiple of 0.8 and a price-to-earnings multiple of abouteight times its trailing 12 months earnings.

    Accepting the offer at Rs 28 per share appears an appropriate strategy for the UWB shareholders.

    A good fit for IDBI

    The amalgamation of UWB with IDBI is likely to add value to the latter over the long term. The

    merger is likely to help IDBI expand its retail presence, though its size may not increasesubstantially.

    Of the several benefits the deal brings, we believe access to the branch network is most significant.IDBI, with a balance-sheet size of Rs 81,700 crore, has a network of 181 branches now. It scores

    poorly on this parameter compared to like-size peers. The merger would give IDBI immediate accessto the 230-branch network of UWB, thereby widening its deposit franchise.

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    For IDBI, growing at 25 per cent over the past two years, addition of branches would help sustain themomentum. Deposits may expand by over 20 per cent and the asset base by about 10 per cent. The

    Reserve Bank of India's (RBI) strict licensing norms that restrains opening new branches has placeda scarcity value on branches. The merger would, therefore, give IDBI access to a ready physical

    infrastructure, enabling it to mobilise low-cost funds.

    Second, the merger with UWB is likely to help IDBI diversify its credit profile. Dominant in industrial

    financing, IDBI should get exposure to agriculture credit through UWB;nearly half the number ofUWB its branches is in semi-urban and rural areas, and should complement IDBI's loan book.

    The third aspect relates to the benefit of an improved deposit mix for IDBI. As it manages itstransformation from a financial institution to a commercial bank, it finds about 60 per cent of the

    liabilities in the form of long-term borrowings. Low-cost deposits are just about 9 per cent of thetotal. This perhaps explains IDBI's low net interest margins (0.5 per cent versus industry average of

    three) and the high cost of funds (6.5 per cent versus the industry average of five). In this backdrop,the access to UWB's low-cost deposit base should prove advantageous for IDBI in the long run.

    Inexpensive acquisition?

    IDBI has offered to pay Rs 28 per share to the UWB shareholders. The purchase consideration, atthis price, works out to about Rs 150 crore. The price-to-book multiple for the acquisition works outto about 1.9. Although this appears slightly high, we believe the price factors in the takeoverpremium attached to UWB's business. Further, UWB has a positive net worth (about Rs 115 crore).Its capital adequacy ratio had turned negative mainly because of technical provisions such as fordepreciation in the value of investments.

    Even with a mere 10 per cent recovery rate and no further slippage in the asset quality, theacquisition would be a value proposition for IDBI. Being a big bank with a high capital adequacy

    (14.8 per cent), it is likely to see larger volumes per branch.

    Key challenges

    On the face of it, an outflow of Rs 150 crore may appear inexpensive. But if one were to consider the

    hidden costs in the form of bad loans and the likely slippages in the quality of existing assets, theeffective cost is likely to go up by another Rs 100 crore.

    Considering IDBI's size, this may still be a small sum. Post-merger, its level of net non-performingassets is likely to increase to 1.4 per cent from about one per cent now. As such, managing and

    containing the level of bad loans remain a challenge for IDBI.

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    In the short term, the IDBI stock is unlikely to deliver significant value. Its management has saidthat UWB would be kept as a strategic business unit in the near term.

    While this may make the balance-sheet look attractive in the short term, the impact of the synergiesthat will flow from the merger will be visible only over the long term.

    Integration of UWB with itself is likely to be a key challenge for IDBI. UWB has an employee base ofover 3,200, which is about 70 per cent of IDBI's.

    Going by the draft amalgamation scheme, IDBI is required to absorb the entire workforce, a movethat is likely to push up its wage cost and make integration a tricky exercise.

    The boards of the two banks have been given time till September 27 by the RBI to discuss theamalgamation scheme and place their objections/suggestions before the central bank.

    As such, the possibility of another bank/institution presenting a better offer to take over UWB cannotbe ruled out, though the chances appear slim at the moment.

    Despite the concerns, the downside risks associated with the merger appear minimum, making theIDBI stock attractive as a long term proposition.

    Attractive bailout for UWB

    The UWB shareholders can accept the offer, priced at Rs 28 per share. That the shareholders of the

    transferor bank are being compensated is in itself a big improvement over the previous such cases.

    Poor asset quality and deteriorating financials had cast a gloomy picture of UWB's future. IDBI, withenough capital at its disposal to absorb the business of UWB, is confident enough to lend succour tothe ailing bank.

    IDBI-IDBI Bank merger ratio fixed at 100:142

    Mumbai, Jan 20: The swap ratio for the merger of IDBI and IDBI Bank has been pegged at 100:142 (100shares of IDBI for 142 shares of IDBI Bank).

    The boards of both banks met on Thursday in Mumbai to approve the scheme of amalgamation between the

    banks to create a merged entity which will have Rs 78,000 crore of assets and manpower of over 4,000. Post-

    merger, the government will continue to hold a majority stake in the merged entity.

    The government will hold 51.3% stake in the merged entity, IDBI chairman and managing director

    Meleveetil Damodaran told reporters after separate board meetings of both the entities.

    Mr Damodaran said, IDBIs 2.5% stake in the bank would be kept in a trust to bring value to shareholders of the

    erstwhile financial institution and the balance holding will be extinguished. The appointed date for the mergerhas been fixed as October 1, 2004. IDBI Ltd has convened an extraordinary general meeting (EGM) on

    February 23, 2005 to seek the approval of its shareholders in this regard.

    Under the merged entity, two strategic business units would be made functional - one for the development

    banking entity and the other for IDBI Bank, he added.

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    The swap ratio is based on the valuation of shares of IDBI Ltd, carried out by BSR & Co. For IDBI Bank, the

    valuation was carried out by Khimji Kunvarji & Co. DSP Merrill Lynch served as the common financialadvisor. IDBI has 120 branches while IDBI bank has 110 branches in the country.

    IDBI Ltd has been systematically preparing itself for the merger for which it has reduced its non-performing

    assets by creating a Rs 9,000 crore Stressed Assets Stabilisation Fund (SASF) and introduced a voluntary

    retirement scheme (VRS) to reduce manpower.

    Mr Damodaran said a detailed scheme of amalgamation of the two entities is with the Reserve Bank of India(RBI), to become effective once they receive regulatory approvals.

    While IDBI Bank is fully compliant with SLR and CRR requirements, IDBI Ltd has a five-year forebearance in

    fulfilling regulatory provisions on the Statutory Liquidity Ratio (SLR) norm.

    IDBI Ltd is also currently in dialogue with the RBI for broadening the definition of priority sector lending forthe newly converted bank. Mr Damodaran said, Priority sector lending should be re-defined with a thrust on

    project lending and term loans.

    Mr Damodaran also expected the merged entity to get special dispensation on its current capital market

    exposure. As a financial institution,...

    IDBI Bank mulls merger of home loan subsidiary

    PTI

    Mumbai: With a view to consolidate its home loan finance business, IDBI Bank is mulling the merger or sale of its wholly-

    owned subsidiary, IDBI Homefinance (IHFL), by end-this fiscal, a top official of the bank said.

    It doesnt make sense for both the bank and its subsidiary to sell the same products. We plan to either merge or sell IHFL,

    a highly-placed IDBI Bank official told PTI.

    The banks board is likely to take a decision on the matter by the end of March next year, the official said.

    IDBI Bank took over the erstwhile Tata Home Finance in September 2003 and renamed it as IHFL, solely meant for selling

    home loan products.

    IHFL, at present, has a home loan portfolio of above Rs2,700 crore with a presence in 18 centres across the country and 150

    employees.

    In the event of a merger, the biggest challenge IDBI Bank would have to face will be on the human resources side as the

    pay-scales of IHFL employees and the bank are different.

    This has to be looked into during the integration process, the official said.

    However, IDBI Bank, which has a home loan portfolio of around Rs12,000 crore, would lose the customer base of IHFL in

    case of a sale and this factor too would weigh with the management when it makes its decision.

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    If a merger is effected, the banks home loan portfolio would increase to around Rs14,000-15,000 crore, catapulting it to a

    top player in the housing finance business.

    For a merger, Reserve Bank approval needs to be sought, the official said.

    Getting regulatory approval for the merger of the bank and its subsidiary will not be a major task as IHFL is wholly-owned

    by the bank. The merger would be just a technical procedure, the official noted.

    For the year ended March 2008, IDBI Capital posted a net profit of Rs30 crore.