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TABLE OF CONTENTS
3 Strategic Implications 10
4 Financial Implications 14
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Department of Management Sciences (PUMBA), University of Pune
Advanced Banking and Insurance
CHAPTER 1
MERGERS AND ACQUISITIONS
1. Acquisition
An acquisition, also known as a takeover, is the buying of one company (the „target‟) by
another. Acquisition usually refers to a purchase of a smaller firm by a larger one.
Sometimes, however, a smaller firm will acquire management control of a larger or
longer established company and keep its name for the combined entity.
Types of acquisitions:
2. Merger
Classification of Mergers:
i. Horizontal mergers: It takes place where the two merging companies produce
similar product in the same industry.
ii. Vertical mergers: They occur when two firms, each working at different stages
in the production of the same good, combine.
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Advanced Banking and Insurance
iii. Congeneric merger/concentric mergers : They occur where two merging firms
are in the same general industry, but they have no mutual buyer/customer or
supplier relationship, such as a merger between a bank and a leasing company.
Example: Prudential's acquisition of Bache & Company.
iv. Conglomerate mergers : It takes place when the two firms operate in different
industries.
v. Accretive mergers: These are those in which an acquiring company's earnings
per share (EPS) increase. An alternative way of calculating this is if a company
with a high price to earnings ratio (P/E) acquires one with a low P/E.
vi. Dilutive mergers: It is the opposite of above, whereby a company's EPS
decreases. The company will be one with a low P/E acquiring one with a high P/E
A unique type of merger called a reverse merger is used as a way of going public without
the expense and time required by an IPO.
When one company takes over another and clearly established itself as the new owner,
the purchase is called an acquisition.
A merger happens when two firms, often of about the same size, agree to go forward as a
single new company rather than remain separately owned and operated. Both companies'
stocks are surrendered and new company stock is issued in its place.
A purchase deal will also be called a merger when both CEOs agree that joining together
is in the best interest of both of their companies. But when the deal is unfriendly - that is,
when the target company does not want to be purchased - it is always regarded as an
acquisition.
conditions, typically a change in company ownership, must be met, but often the
cause of termination is unspecified. These benefits may include severance pay, cash
bonuses, stock options, or other benefits.
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Department of Management Sciences (PUMBA), University of Pune
Advanced Banking and Insurance
CHAPTER 2
1. Introduction
One of the principal objectives behind the mergers and acquisitions in the banking
sector is to reap the benefits of economies of scale.
With the help of mergers and acquisitions in the banking sector,
achieve significant growth in their operations and
Minimize their expenses to a considerable extent.
Competition is reduced because merger eliminates competitors from the banking
industry.
Mergers and acquisitions in banking sector are forms of horizontal merger
because the merging entities are involved in the same kind of business or
commercial activities. Sometimes, non-banking financial institutions are also
merged with other banks if they provide similar type of services.
Through mergers and acquisitions in the banking sector, the banks look for
strategic benefits in the banking sector. They also try to enhance their customer
base. Growth achieved by taking assistance of the mergers and acquisitions in the
banking sector may be described as inorganic growth.
In many countries, global or multinational banks are extending their operations
through mergers and acquisitions with the regional banks in those countries.
These mergers and acquisitions are named as cross-border mergers and
acquisitions in the banking sector or international mergers and acquisitions in the
banking sector. By doing this, global banking corporations are able to place
themselves into a dominant position in the banking sector, achieve economies of
scale, as well as garner market share.
Mergers and acquisitions in the banking sector have the capacity to ensure
efficiency, profitability and synergy. They also help to form and grow shareholder
value. In some cases, financially distressed banks are also subject to takeovers or
mergers in the banking sector and this kind of merger may result in monopoly and
job cuts.
Deregulation in the financial market, market liberalization, economic reforms, and
a number of other factors have played an important function behind the growth of
mergers and acquisitions in the banking sector. Nevertheless, there are many
challenges that are still to be overcome through appropriate measures. Mergers
and acquisitions in banking sector are controlled or regulated by the apex
financial authority of a particular country. For example, the mergers and
acquisitions in the banking sector of India are overseen by the Reserve Bank of
India (RBI).
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Advanced Banking and Insurance
A. General
1.1 The Reserve Bank has discretionary powers to approve the voluntary amalgamation
of two banking companies under the provisions of Section 44A of the Banking
Regulation Act, 1949.
1.2 These powers do not extend to the voluntary amalgamation of a banking company
with a non-banking company where amalgamations are governed by sections 391 to 394
of the Companies Act, 1956 in terms of which, the scheme of amalgamation has to be
approved by the High Court.
1.3 However, in both situations, the Reserve Bank is concerned that while amalgamations
are normally decided on business considerations such as the need for increasing the
market shares, synergies in the operations of businesses, acquisition of a business unit or
segment etc., it is essential that considerations like sound rationale for the amalgamation,
the systemic benefits and the advantage accruing to the residual entity are evaluated in
detail.
1.4 These guidelines cover two situations namely:
(a) An amalgamation of two banking companies
(b) An amalgamation of a non-banking finance company (NBFC) with a banking
company.
2.1.1 Section 44A of the Banking Regulation Act, 1949 requires that the draft scheme of
amalgamation has to be approved by the shareholders of each banking company by a
resolution passed by a majority in number representing two-thirds in value of the
shareholders, present in person or by proxy at a meeting called for the purpose.
2.1.2 Before convening the meeting for the purposes of obtaining the shareholders'
approval, the draft scheme of amalgamation needs to be approved individually by the
Boards of Directors of the two banking companies. When according this approval, the
Boards need to give particular consideration to the following matters :-
(a) The values at which the assets, liabilities and the reserves of the amalgamated
company are proposed to be incorporated into the books of the amalgamating banking
company and whether such incorporation will result in a revaluation of assets upwards or
credit being taken for unrealized gains.
(b) Whether due diligence exercise has been undertaken in respect of the amalgamated
company.
(c) The nature of the consideration, which, the amalgamating banking company will pay
to the shareholders of the amalgamated company.
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Advanced Banking and Insurance
(d) Whether the swap ratio has been determined by independent valuers having required
competence and experience and whether in the opinion of the Board such swap ratio is
fair and proper.
(e) The shareholding pattern in the two banking companies and whether as a result of the
amalgamation and the swap ratio the shareholding of any individual, entity or group in
the amalgamating banking company will be in violation of the Reserve Bank guidelines
or require its specific approval.
(f) The impact of the amalgamation on the profitability and the capital adequacy ratio of
the amalgamating banking company.
(g) The changes which are proposed to be made in the composition of the board of
directors of the amalgamating banking company, consequent upon the amalgamation and
whether the resultant composition of the Board will be in conformity with the Reserve
Bank guidelines in that behalf.
2.2.1 Section 44A of the Banking Regulation Act, 1949 also requires that after the
scheme of amalgamation is approved by the requisite majority of shareholders in
accordance with the provisions of the Section, it shall be submitted to the Reserve Bank
for sanction.
2.2.2 To enable the Reserve Bank to consider the application for sanction, the
amalgamating banking company should submit to the Reserve Bank the information and
documents specified in Annexure A.
2.3.1 The aforementioned Section provides that a dissenting shareholder is entitled, in the
event of the scheme being sanctioned by the Reserve Bank, to claim from the banking
company concerned, in respect of the shares held by him in that company, their value as
determined by the Reserve Bank when sanctioning the scheme and such determination by
the Reserve Bank as to the value of the shares to be paid to the dissenting shareholders
shall be final for all purposes.
2.3.2 To enable the Reserve Bank to determine such value, the amalgamated
banking company should submit the following: -
(a) a report on the valuation of the share of the amalgamated company made for this
purpose by the valuers appointed for the determination of the swap ratio
(b) Detailed computation of such valuation
(c) Where the shares of the amalgamated company are quoted on the
Stock exchange:-
(i) Details of the monthly high and low of the quotation on the exchange where the shares
are most widely traded together with number of shares traded during the six months
immediately preceding the date on which the scheme of amalgamation is approved by the
Boards.
(ii) the quoted price of the share at close on each of the fourteen days immediately
preceding the date on which the scheme of amalgamation is approved by the Boards.
(d) Such other information and explanations as the Reserve Bank may require.
3.1 Where the NBFC is proposed to be amalgamated into a banking company, the
banking company should obtain the approval of the Reserve Bank of India after the
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Department of Management Sciences (PUMBA), University of Pune
Advanced Banking and Insurance
scheme of amalgamation is approved by its Board but before it is submitted to the High
Court for approval.
3.2 When according its approval to the scheme, the Board should give consideration to
the matters listed in paragraph 2.1.2 above. In addition, it should examine whether: -
(a) The NBFC has violated / is likely to violate any of the RBI/SEBI norms and if so,
ensure that these norms are complied with before the scheme of amalgamation is
approved.
(b) The NBFC has complied with the "Know Your Customer" norms for all the accounts,
which will become accounts of the banking company after amalgamation.
(c) The NBFC has availed of credit facilities from banks/FIs and if so,whether the loan
agreements mandate the NBFC to seek consent of the bank/FI concerned for the proposed
merger/amalgamation.
3.3 To enable the Reserve Bank of India to consider the application for approval, the
banking company should furnish to Reserve Bank of India information and documents
listed in Annexure A excluding item 4 and also the information and documents listed in
paragraph 2.3.2 above.
3.4 The provision of paragraphs 3.1 to 3.3 above will also apply mutatis mutandis
in the rare cases where a banking company is amalgamated into an NBFC.
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Department of Management Sciences (PUMBA), University of Pune
Advanced Banking and Insurance
CHAPTER 3
STRATEGIC IMPLICATIONS
a. Identifying Opportunity
The ability to strengthen the network and drive key growth areas along with the
access to high end technological solutions and qualified manpower in the acquired
bank. The opportunity also lies in the sphere of significant value over the longer
term through M&A, risk sharing of the product and asset portfolio and an
expansion in geographic reach without having to reinvent the wheel.
d. Win-Win Transactions
The transactions conducted in the M&A space for Indian banking have always
proved to be highly beneficial for the buyers and sellers (promoters and
acquirers). The key to achieving a win-win transaction will depend upon the kind
of benefits that these mergers can create for customers (more product options,
better service), employees (higher retention and enhanced growth opportunities)
and society (fail safe banks and wider access). The objective of failsafe banks is
brought forward in a twisted manner by creating banks that are too big to fail
(TBTF) and require a government bailout when in crisis.
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Department of Management Sciences (PUMBA), University of Pune
Advanced Banking and Insurance
when two organizations are merged together; the reason for failure in a majority
of mergers has been the clash of diverse cultures. The key to a successful merger
lies in avoiding such clashes and achieving cultural integration in a phased and
dedicated timeframe with minimal costs.
f. Talent Retention
While talent retention is the least likely cause of effecting a merger, it is the most
prominent prerogative for the acquiring company to ensure that the synergies and
benefits it expects from the merger on paper are truly realized on the ground. The
ability to retain and gain the confidence of key executives in the acquired
organization will go a long way in the success of the merger and the benefits that
the acquiring company wishes to achieve from it.
g. Discovering Synergy
The idea behind every M&A activity is to identify areas where new opportunities
can be explored, plugging gaps in the existing portfolio of the acquiring company
and looking for opportunities of synergy. Ideally the possibilities of synergy
would have been discovered during the process of due diligence, however if new
opportunities or arenas come to light after acquisition, they need to be vetted and
evaluated to identify their fit in the long term strategy of the Bank.
h. Aggressive Integration
After the acquisition process is complete, the need for integration becomes
imperative. This process of integration should be pursued aggressively with a
definite timeline in mind. The inability to do so will lead to customer
dissatisfaction, lost opportunity and regulatory tangles. It can easily be achieved
by conducting workshops and training sessions for the employees of the
respective organizations.
The following figure gives an idea of the considerations of the buyers and sellers:
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Advanced Banking and Insurance
The other important factors while considering the M&A deal will be as follows:
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Advanced Banking and Insurance
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Advanced Banking and Insurance
CHAPTER 4
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Department of Management Sciences (PUMBA), University of Pune
Advanced Banking and Insurance
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Advanced Banking and Insurance
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Department of Management Sciences (PUMBA), University of Pune
Advanced Banking and Insurance
CHAPTER 5
IMPACT ON THE ECONOMY
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Advanced Banking and Insurance
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Advanced Banking and Insurance
CHAPTER 6
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Department of Management Sciences (PUMBA), University of Pune
Advanced Banking and Insurance
Synergies: the combined company can often reduce its fixed costs by removing
duplicate departments or operations, lowering the costs of the company relative to
the same revenue stream, thus increasing profit margins.
Increased revenue/Increased Market Share: This assumes that the buyer will be
absorbing a major competitor and thus increase its market power (by capturing
increased market share) to set prices.
Cross selling: For example, a bank buying a stock broker could then sell its
banking products to the stock broker's customers, while the broker can sign up the
bank's customers for brokerage accounts. Economies of Scale: For example,
managerial economies such as the increased opportunity of managerial
specialization. Another example is purchasing economies due to increased order
size and associated bulk-buying discounts.
Taxes: A profitable company can buy a loss maker to use the target's loss as their
advantage by reducing their tax liability.
Resource transfer: resources are unevenly distributed across firms and the
interaction of target and acquiring firm resources can create value through either
overcoming information asymmetry or by combining scarce resources.
Vertical integration: Vertical Integration occurs when an upstream and
downstream firm merges (or one acquires the other). By merging the vertically
integrated firm can collect one deadweight loss by setting the upstream firm's
output to the competitive level. This increases profits and consumer surplus. A
merger that creates a vertically integrated firm can be profitable.
Therefore, additional motives for merger and acquisition that may not add shareholder
value include:
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Department of Management Sciences (PUMBA), University of Pune
Advanced Banking and Insurance
CHAPTER 7
SYNERGY AND VALUE PROPOSITION
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Department of Management Sciences (PUMBA), University of Pune
Advanced Banking and Insurance
(4) Compliance
Increased capital base allows bank to comply easily with regulatory guidelines.
This make banks to focus more on profit making business activities rather than
trying to make adjustments for regulatory compliances. It also increases customer
service resulting in lower costs and foray into new product categories
(5) Efficiency
Increased operating efficiency allows banks to provide value added services to its
customer resulting into better customer relationship management and the ability to
service larger number of customer in a given duration thereby reducing costs
(8) Technology
It can be economical only when it is implemented on a larger scale. M&As has
made this possible for Indian banking and cloud computing gives better results in
the future when combined with Business Correspondent (BC) model.
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Department of Management Sciences (PUMBA), University of Pune
Advanced Banking and Insurance
CHAPTER 8
BANKING M&A CASES IN INDIA
The history of Indian banking can be divided into three main phases:
Phase I (1786- 1969) - Initial phase of banking in India when many small banks
were set up
Phase II (1969- 1991) - Nationalization, Regularization and growth
Phase III (1991 onwards) - Liberalization and its aftermath
With the reforms in Phase III the Indian banking sector, as it stands today, is mature in
supply, product range and reach, with banks having clean, strong and transparent balance
sheets. The major growth drivers are increase in retail credit demand, proliferation of
ATMs and debit-cards, decreasing NPAs due to Securitization, improved macroeconomic
conditions, diversification, interest rate spreads, and regulatory and policy changes (e.g.
amendments to the Banking Regulation Act).
Certain trends like growing competition, product innovation and branding, focus on
strengthening risk management systems, emphasis on technology have emerged in the
recent past. In addition, the impact of the Basel II norms is going to be expensive for
Indian banks, with the need for additional capital requirement and costly database
creation and maintenance processes. Larger banks would have a relative advantage with
the incorporation of the norms.
The Narsimhan Committee report on the Indian Banking Industry has been a watershed event as it
has clearly laid down the path to be adopted for the Indian Banking industry to be globally
competitive, functionally relevant and able to fulfil the needs and aspirations of the New India.
It lays emphasis on the following factors:
Improving the productivity and profitability of the existing Public Sector Banks
Opening up the sector for private sector and foreign Banks to increase
competition and deliver better customer service
Consolidation of the Indian Banking industry to 3-4 banks at the International
Level, 20-25 banks at the National Level and around 100 Banks at the local level
to streamline the Banking system.
The focus of the drive for consolidation will be to merge co-operative sector banks into
established banks and also reduce the number of Public Sector Banks from the current
number to a more realistic number of 6-7. Also with Basel III norms to be implemented
in the sector by 2012 and the drive for Financial Inclusion, consolidation in the Banking
sector by way of M&A looks to be a prudent way out. Now we discuss around 8
prominent cases of M&A in the Indian Banking Industry.
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Department of Management Sciences (PUMBA), University of Pune
Advanced Banking and Insurance
On February 25th the boards of HDFC Bank and Centurion Bank of Punjab (CBoP)
agreed to the biggest merger in Indian banking history, valued at around `95.2bn
(US$2.4 billion). The merger is subject to statutory and regulatory approvals. CBoP
shareholders got one share of HDFC Bank for 29 shares of CBoP. The merged entity was
called HDFC Bank. . HDFC Bank has lived up to its parent's pedigree, turning out
consistent growth of at least 30% in net profits year after year and becoming a stock
market favorite.
More benefits
That regional strength is one of the benefits that HDFC Bank was looking for, but the
merger will also offer several others. HDFC Bank says it was looking to supplement
organic growth with a merger that would add scale, geographical reach and experienced
staff, which is in short supply. HDFC Bank has 23,000 employees while CBoP has about
7,500. The deal will add 394 branches and 452 ATMs to HDFC Bank's existing 754
branches and 1,906 ATMs, giving the combined entity 1,148 branches. That will be the
country's largest private branch network, larger than private-sector leader ICICI Bank's
955 branches.
But even post-merger, HDFC Bank will be only the third-largest bank by assets in India
after the market leaders, the State Bank of India (SBI) and ICICI Bank, both of which
will outrank it by a wide margin. Based on figures from end-December 2007, the new
entity will have assets of about Rs1.5 trillion, against SBI's Rs5.7 trillion and ICICI
Bank's Rs3.8 trillion. The merged entity will also have a deposit base of around Rs1.2trn
and net advances of around Rs850 billion.
On the day the swap ratio was announced, CBoP shares, which had run up in anticipation,
fell 14.5% to Rs48.25 per share in adjustment to the ratio. HDFC Bank shares, however,
fell 3.5% to close at Rs1, 422.70 a share, reflecting investor concerns that CBoP's
valuation was too high. CBoP's asset quality and resource profile, though healthy, are
slightly weaker than HDFC Bank's own and could impact HDFC Bank adversely in the
short term. For example, HDFC Bank's net non-performing assets as a percentage of net
advances for fiscal year 2006/07 stood at an excellent 0.43%, compared to the higher--
though still acceptable--figure of 1.26% for CBoP. HDFC Bank's capital adequacy is
13.8% against CBoP's 11.5%.
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Department of Management Sciences (PUMBA), University of Pune
Advanced Banking and Insurance
Intent of ICICI
ICICI Bank‟s proposal to merge The Sangli Bank and Bank of Rajasthan with itself is
line with the former‟ strategy to rapidly expand its rural and small enterprise banking
operations; these two segments are among the main growth drivers identified by ICICI
Bank.
Benefits
This had enhanced ICICI‟s branch network of about 625 branches and extension
counters by almost 32% to 823.
Half of Sangli Bank‟s branches were in rural and semi-rural India. And with nearly half
a million customers and loan offerings like agriculture, home, education, personal, etc,
Sangli Bank is a good fit for ICICI.
For Sangli Bank‟s shareholders too, it was profitable deal the merger ratio of 100 shares
of ICICI for 925 shares of Sangli Bank translates into a value of Rs 282.6 crore and an
equity dilution of 0.39% for ICICI Bank.
It‟s a win-win for both. While Sangli Bank‟s balance-sheet size is not significant;
advances of Rs 880 crore and deposits of Rs 2,004 crore, apart from network, it also
provides ICICI Bank access to Sangli Bank‟s customer base, which can used to cross-sell
various products and services. And given ICICI Bank‟s track record, the gains should
materialize sooner rather than later.
Sangli Bank‟s current-and-savings-account deposit ratio is also estimated at around
40%, again a positive for IB, which is seeking low-cost deposit base.
However, Sangli Bank had reported a loss of Rs 29 crore for 2005-06 and its net NPA
ratio stood at 2.1%. Besides, its capital adequacy ratio of just 1.64% is far from the
minimum of 9% mandated by regulations. This is where the merger with ICICI Bank will
make a difference, given its size (deposits of nearly Rs 200,000 crore), profitability (net
profit of Rs 2,540 crore for 2006-07), range of products and technology among others.
With the merger, the turnover of ICICI Bank would cross Rs4, 00,000 crore. BoR has a
total business of over `23,000 crore, against nearly Rs3, 84,000 crore of ICICI Bank
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Department of Management Sciences (PUMBA), University of Pune
Advanced Banking and Insurance
GTB‟s audited balance sheet for March 31, 2002, showed net worth of Rs 400.4
crore & a profit of Rs 40 crore. However, RBI‟s inspection revealed that net worth is
negative. RBI‟s inspection in 2002-03 showed that GTB‟s net worth has further eroded
and capital adequacy ratio (CAR) was negative. GTB was advised to take immediate
steps to infuse fresh capital to restore its CAR to 9% and indicate a time-bound program.
Global Trust Bank Ltd., (GTB) was placed under an Order of Moratorium on July
24, 2004. The option available with the Reserve Bank was to compulsory merger under
section 45 of the Banking Regulation Act, 1949. Oriental Bank of Commerce (OBC)
interest was examined by the Reserve Bank of India keeping in view its financial
parameters, its retail network and its synergies as well as strategic advantages. Taking
into account the interests of the millions of depositors of GTB, the Reserve Bank
prepared following draft scheme of amalgamation of GTB with OBC. The amalgamation
came into force on August 14, 2004.
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, the effective 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-
performing assets 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.
Integration of UWB with itself is likely to be a key challenge for IDBI. UWB has
an employee base of over 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 move that is
likely to push up its wage cost and make integration a tricky exercise.
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Department of Management Sciences (PUMBA), University of Pune
Advanced Banking and Insurance
8.5 Shree Suvarna Sahakari Bank with Indian Overseas Bank (IOB)
State-run Indian Overseas Bank (IOB) acquired the troubled Shree Suvarna Sahakari
Bank (SSSB), nearly ten months after it planned the acquisition. The bank would not
pursue acquisition of co-operatives for expansion in the future because of the difficulties
involved in securing branch licenses for the acquired bank. SSSB's NPAs account for
more than Rs 300 crore, primarily due to connected lending. The 37-year-old cooperative
bank, SSB has 12 branches, nine in Pune, two in Mumbai and one in Shripur. The total
employee strength is reportedly a little over 100 with deposits of more than Rs 700 crore
currently has accumulated losses to the tune of Rs 300 crore. The acquisition will provide
access to three lakh customers and open the doors for agro-financing opportunities in the
region.
Giro Commercial Bank, which was formed after the merger of two small banks - Giro
Bank and Commerce Bank - is one of the leading banks in Kenya. It is a closely held
entity with promoters of Indian origin and the bank has six branches located in Nairobi,
Mombassa and Kisumu.
The decision to take over Giro Commercial Bank came six months after its first overseas
acquisition of Indian Ocean International Bank of Mauritius for $10 million. The
acquisitions are part of SBI's broad plan to acquire at least four banks abroad each with
assets of $50-200 million.
The government wants consolidation in the banking sector and emergence of 4-5
international level banks to exist alongside 4-5 national level banks. Indian banks have to
adopt stringent Basel II norms from 2007 which prescribes for higher provisioning for
operational and market risks. The higher capital requirement and investment on
technology will further push consolidation process in the near future.
In the past few years SBI has successfully completed the merger and amalgamation of
State Bank of Saurashtra (SBS) and State Bank of Indore (SBIn) into itself to increase its
size and reach. The ultimate aim is to merge all the remaining associate banks to create
an organization of international scale and standards.
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Department of Management Sciences (PUMBA), University of Pune
Advanced Banking and Insurance
CHAPTER 9
Based on the trends in the banking sector and the insights from the cases highlighted in
this study, one can list some steps for the future which banks should consider, both in
terms of consolidation and general business. Firstly, banks can work towards a synergy-
based merger plan that could take shape latest by 2009 end with minimization of
technology-related expenditure as a goal. There is also a need to note that merger or large
size is just a facilitator, but no guarantee for improved profitability on a sustained basis.
Hence, the thrust should be on improving risk management capabilities, corporate
governance and strategic business planning. In the short run, attempt options like
outsourcing, strategic alliances, etc. can be considered. Banks need to take advantage of
this fast changing environment, where product life cycles are short, time to market is
critical and first mover advantage could be a decisive factor in deciding who wins in
future. Post-M&A, the resulting larger size should not affect agility. The aim should be to
create a nimble giant, rather than a clumsy dinosaur. At the same time, lack of size should
not be taken to imply irrelevance as specialized players can still seek to provide niche and
boutique services.
In 2009, further opening up of the Indian banking sector is forecast to occur due to the
changing regulatory environment (proposal for up to 74% ownership by Foreign banks in
Indian banks). This will be an opportunity for foreign banks to enter the Indian market as
with their huge capital reserves, cutting-edge technology, best international practices and
skilled personnel they have a clear competitive advantage over Indian banks. Likely
targets of takeover bids will be Yes Bank and IndusInd Bank. However, excessive
valuations may act as a deterrent, especially in the post-sub-prime era.
Persistent growth in Indian corporate sector and other segments provide further motives
for M&As. Banks need to keep pace with the growing industrial and agricultural sectors
to serve them effectively. A bigger player can afford to invest in required technology.
Consolidation with global players can give the benefit of global opportunities in funds'
mobilization, credit disbursal, investments and rendering of financial services.
Consolidation can also lower intermediation cost and increase reach to underserved
segments.
The Narasimhan Committee (II) recommendations are also an important indicator of the
future shape of the sector. There would be a movement towards a 3-tier structure in the
Indian banking industry: 2-3 large international banks; 8-10 national banks; and a few
large local area banks. In addition, M&As in the future are likely to be more market-
driven, instead of government-driven.
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Department of Management Sciences (PUMBA), University of Pune
Advanced Banking and Insurance
CHAPTER 10
ANNEXURES
Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06
Equity share capital 634.88 634.88 631.47 526.3 526.3
Reserves & surplus 65,314.32 57,312.82 48,401.19 30,772.26 27,117.79
Total Loan Funds 8,70,065.43 8,00,020.82 5,86,436.60 4,66,819.65 4,07,690.14
Investments 2,85,790.07 2,75,953.96 1,89,501.27 1,49,148.88 1,62,534.24
Total net current assets 2,44,979.03 2,06,827.50 1,53,929.48 1,17,217.80 1,32,129.85
Number of equity shares
outstanding (Lacs) 6348.83 6348.8 6314.7 5262.99 5262.99
Operating income 85,909.36 74,880.76 56,821.55 43,860.57 37,869.52
Adjusted PAT 9,176.51 9,124.18 6,718.08 4,529.18 4,404.73
Equity dividend 1,904.65 1,841.15 1,357.66 736.82 736.82
Adjusted EPS (Rs) 144.54 143.71 106.39 86.06 83.69
Dividend per share 30 29 21.5 14 14
Net operating income
per share (Rs) 1,353.15 1,179.45 899.83 833.38 719.54
Operating margin (%) 16.96 19.5 19.29 17.72 17.33
Net profit margin (%) 10.54 12.03 11.65 10.12 11.21
Reported return on net
worth (%) 13.89 15.74 13.72 14.5 15.94
Total debt/equity 12.19 12.81 10.96 13.91 13.75
Owners fund as % of
total source 7.57 7.24 8.36 6.7 6.78
Fixed assets turnover
ratio 7.26 7.2 6.32 5.44 5.1
Current ratio 0.43 0.34 0.53 0.42 0.4
Dividend payout ratio
(net profit) 23.36 22.9 22.64 18.98 19.06
Dividend payout ratio
(cash profit) 21.2 21.13 20.56 16.75 16.35
29
Department of Management Sciences (PUMBA), University of Pune
Advanced Banking and Insurance
Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06
Equity share capital 1,114.89 1,113.29 1,112.68 899.34 889.83
Reserves & surplus 50,503.48 48,419.73 45,357.53 23,413.92 21,316.16
Total loan Funds 2,53,634.96 2,68,230.84 2,91,251.26 2,55,173.45 1,87,639.16
Investments 1,20,892.80 1,03,058.31 1,11,454.34 91,257.84 71,547.39
Total net current assets 14,496.05 -9,362.37 -11,765.62 -14,676.78 -9,585.09
30
Department of Management Sciences (PUMBA), University of Pune
Advanced Banking and Insurance
Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06
Equity share capital 724.86 724.78 724.76 724.35 723.79
Reserves & surplus 7,502.26 6,719.52 6,075.13 5,511.60 5,648.26
Total 1,75,894.20 1,19,845.31 79,797.88 49,589.99 32,372.98
Investments 73,345.46 50,047.60 32,802.93 25,675.31 25,350.53
Total net current assets -3,585.71 -1,277.45 -6,107.86 -3,777.31 -4,360.10
31
Department of Management Sciences (PUMBA), University of Pune
Advanced Banking and Insurance
CHAPTER 11
BIBLIOGRAPHY
References
1. India Finance and Investment Guide, 'History of Banking in India'. August 2010.
2. C.R.L. Narisimhan, 'A touch of history in Indian Banking, November 2009
3. Reserve Bank of India 'Developments in commercial banking November 2010.
4. Government of India, Ministry of Finance 'The Banking Regulation Act of 1949
(Section 45.2)'
5. Red herring prospectus of Bank of Baroda dated December 29, 2005.
6. K. Venu Babu, 'ICICI or Bank of Madura: Who will benefit?', July 31, 2008
7. 'ICICI Bank Ltd. - Analysts' transcript, August 2010
8. BS Bureaus, 2004, 'SBI may take over GTB', July 26, 2004,
9. Dr. Rupa Rege Nitsure (Chief Economist, Bank of Baroda), 'Consolidation of
Banks - Some Thoughts', Financial Sector Seminar Series , April 8, 2008
Websites
32
Department of Management Sciences (PUMBA), University of Pune