1. Corporate Restructuring via Amalgamation in Private Sector
Banks
A Case Study of HDFC Bank and Centurion Bank of Punjab
______________________________________________________
a) Prof. Deepak Tandon (b) Manish Vohra & Meenakshi Saluja
Professor –Finance PGP IInd Year students (Finance)
IILM, Plot 69, Sector 53, Gurgaon manish.vohra.pgp09@iilm.edu,
Email - deepak.tandon@iilm.edu meenakshi.saluja.pgp09@iilm,.edu
9811688833
ABSTRACT
Amalgamation in the Indian Banking Industry are the most happening arena apropos the
ballooning effect of NPA (Non Performing assets).Deregulation, favorable economic, financial
conditions and the structural legal changes have strategically made the” survival of the fittest”
theorem as a reality in the Indian Banking Sector. Keeping in view the financial restructuring of
the Banks and the aftermaths of the amalgamation the authors have attempted the intricacies and
financial basis of the amalgamation in the Banking sector. The authors have empirically studied
the basis of the scheme of amalgamation of HDFC Bank and Centurion Bank of Punjab. The
main aim of this research is to evaluate share swap ratio of this merger apart from what they have
benefited individually.. Extensive use of the EPS (earning per share) Discounted Cash Flow,
Terminal Value techniques has been explained whilst calculating the Share Exchange Ratio
(SER) and NSE (Net Share Exchange Ratio). Other key parameters of the strategic fitness in
terms of cultural approach of business have also been discussed. Post the merger, HDFC Bank’s
gains and the economies of scale have also been elaborated.
2. Key Words
SER (Share Exchange Ratio) NSE (Net Share Exchange ratio)
DCF (Discounted Cash Flow Technique) EPS (Earning Per Share)
TV (Terminal Value) WACC ( Weighted Average Cost of Capital)
INTRODUCTION
In order to nurse corporate health and growth pattern of developing and developed countries
especially eradicating sickness in industries, the concept of mergers and acquisitions is very
popular in current scenario. Moreover, it is significantly popular concept after 1990s in India on
the birth of liberalization and globalization. The basic crux of Mergers and Acquisitions are
consolidating the process of survival of existing undertakings, large groups absorbing small
entities, cooperation of international business units welcoming to participate in the development
of nation’s economic growth and prosperity, to eliminate industrial sickness, to take tax
advantages, or free from stringent formalities of official procedures and red tape and corporate
restructuring and reorganization to meet challenges in the stiff competitive open market economy
demand such a task of mergers and acquisition.
The prevalence and success of consolidation in the banking sector across the world and the
compulsions imposed by globalization will make this dictum more visible in the Indian financial
system in the near future. The financial sector reforms set in motion in 1991 have greatly
changed the face of Indian banking. While the banking system in India has done fairly well in
adjusting to the new market dynamics, it would not be clichéd to reiterate that greater challenges
lie ahead.
The financial sector would be open to international competition once the tone for the rules of the
game is set under the WTO. Banks will have to gear up to meet stringent prudential capital
adequacy norms under Basel-II as they compete with banks with greater financial strength.
3. In the past, mergers were initiated by regulators to protect the interest of depositors of weak
banks. But it is now expected that market led mergers may gain momentum in the coming years.
The smaller banks with firm financials as well as the large ones with weak income statements
would be the obvious targets for the larger and better run banks. The pressures on capital
structure in particular is expected to trigger a phase of consolidation in the banking industry and
the pace would be swifter than we can conceive of today.
Bank mergers in India have often been viewed as shotgun marriages: A strong bank takes over a
weaker institution -- usually one that is about to go belly-up -- at the behest of the country's
central banker, the Reserve Bank of India (RBI). Sometimes the deal doesn't make sense, but
regulators force it through.
.
• The merger of the banking companies in India attract Section 44 A of the Banking
Regulation Act 1949 unlike other companies which are bound by Section / s 390 – 396 of
Indian Companies Act 1956. The central government has powers to undergo the drill of
amalgamating two banks as follows:
1. Draft scheme is to be approved by the respective boards of the amalgamating banks and
pass the same in EGM (Extraordinary general Meeting) of the shareholders.
2. Majority (2/3 rd) voting of the shareholders is passed.
3. Scheme to be submitted to RBI for vetting giving compliances of Section 44 A (4) of the
Banking Regulation Act 1949
4. Scheme of merger need not be approved by the High Court as mandatory for banks under
the Companies Act 1956.
Value Creation through Merger and Acquisition
A merger will make economic sense to the acquiring firm if its shareholders wealth is
maximised. Merger will create an economic advantage (EA) when the combined present value of
the merged firms is greater than the sum of the individual present values as separate entities.
4. For example, if firm P and firm Q merge, and they separately worth Vp and Vq, respectively and
worth Vpq in combination, then the economic advantage will occur if:
Vpq > (Vp +Vq)
Vpq = Vp + Vq + Synergy
The economic advantage is equal to:
EA=Vpq – (Vp+Vq)
Acquisition or merger involves costs. Suppose that firm P acquires firm Q. After acquisition P
will gain the present value of Q, i.e Vq, but it also have to pay price to Q. Thus, the cost of
merging to P is: Cash paid – Vq. For P, the net economic advantage of merger (NEA) is positive
if the economic advantage exceeds the cost of merging.
Net Economic Advantage =Economic advantage – cost of merger
NEA= [Vpq-(Vp+Vq)] – (cash paid – Vq)
The economic advantage, i.e., [Vpq – (Vp + Vq)], represents the benefits resulting from
operating efficiencies and synergy when two firms merge. If the acquiring firm pays cash equal
to the value of the acquired firm, i.e. cash paid – Vq = 0, then the entire economic advantage of
merger will accrue to the shareholders of the acquired firm. In practice, the acquired and
acquiring firm may share the economic advantage between themselves.
The Indian Banking System and Economic Reforms
Keeping in view the structure of the Commercial banks in India and the growth of the Economic
reforms, Mergers and Acquisitions are most sought after means of reconstruction.
5. The economic reforms brought about a comprehensive change in the competitive landscape of
the Indian Banking System forcing many of the incumbent banks to adopt mergers and
acquisitions with the objective of restructuring themselves in order to enhance their efficiency,
profitability, and competitive strength. In addition, the Government introduced policy
initiatives aimed at deregulation and encouragement of mergers with a view to increasing the
size, profitability, and financial strength of Indian Banks thereby enhancing their capability to
compete globally. This climate of relaxed merger regulations fostered an increase in the
number of merger deals among Indian firms. In light of this, the dearth of empirical studies
examining efficiency benefits flowing from these mergers is surprising. The following section
provides a review of the few such studies that comprise this literature on Indian bank mergers.
B. OBJECTIVES OF THE STUDY
1. To study the SWOT analysis of the consolidation of the two banks. Since the banking
industry has already challenges in terms of managing capital. branch network, people,
technology; a need for low cost technology is felt. Various parameters of profitability
(operational efficiency and net interest margin, net interest income, non performing
assets) need to be studied.
2. Changes in the key managerial personnel, infusion of capital, operational efficiencies,
new products, work culture, improved ratings and profitability’s are the necessary
outcomes of the Indian banks consolidation and help to increase or sustain the interest
income. This can be easily depicted in the mergers among the Indian banks.
3. To study the profiles of the two banks namely Centurion Bank and HDFC Bank, Swap
Ratio, Suitability analysis and the aftereffect of synergies of the merger.
4. To give a transparent, scalable, reliable table as a tool for the researcher giving explicitly
the situation of pre – merger and post – merger of the two banks in the study.
6. C. METHODOLOGY
Case study analysis: Merger between HDFC Bank Ltd and Centurion Bank of Punjab
About HDFC BANK
Promoted in 1995 by housing development finance corporation (HDFC), India’s leading housing
finance company, HDFC Bank is one of India’s premier banks providing a wide range of
financial products and services to its over 11 million customers across over three hundred cities
using multiple distribution channels including a Pan-India network of branches, ATMs, phone
banking, net banking and mobile banking. Within a relatively short span of time, the bank has
emerged as a leading player in retail banking, wholesale banking, and treasury operations, its
three principal business segments.
The bank’s competitive strength clearly lies in the use of technology and the ability to deliver
world-class service with rapid response time. Over the last 13 years, the bank has successfully
gained market share in its target customer franchises while maintaining healthy profitability and
assets quality.
As on December 31, 2007, the bank had a network of 754 branches and 1,906 ATMs in 327
cities. For the quarter ended December 31, 2007, the bank reported a net profit of Rs. 4.3 billion,
up 45.2%, over the corresponding quarter of previous year. Total balance sheet size too grew by
46.7% to Rs.1, 314.4 billion.
About Centurion Bank of Punjab
Centurion Bank of Punjab is one of the leading new generation private sector banks in India. The
bank serves individual consumers, small and medium businesses and large corporations with a
full range of financial products and services for investing, lending and advice on financial
planning. The bank offers its customers an array of wealth management products such as mutual
funds, life and general insurance and has established a leadership ‘position’. The bank is also
strong player in foreign exchange services, personal loans, mortgages and agricultural loans.
Additionally the bank offers a full site of NRI banking products to overseas Indians.
7. On August 29, 2007, Lord Krishna Bank (LKB) merged with Centurion Bank of Punjab, Post
obtaining all statutory and regulatory approvals. This merger has further strengthened the
geographical reach of the bank in major town and cities across the country, especially in the
State of Kerala, in addition to its existing dominance in the northern part of the country.
Centurion Bank of Punjab now operates on a strong nationwide franchise of 394 branches and
452 ATMs in 180 locations across the country, supported by employee base of over 7,500
employees. In addition to being listed on the Indian stock exchanges, the bank’s shares are also
listed on the Luxembourg stock exchange.
Centurion Bank is India’s fourth largest private-sector bank, after the significantly larger ICICI
Bank, HDFC Bank and UTI Bank. Centurion's balance sheet is of modest scale, much smaller
than those of major private-sector banks. The bank is capitalized to support rapid growth, and its
high fixed operating costs suggest that profitability is leveraged to asset growth. Centurion's
acquisition of Bank of Punjab has substantially bolstered its distribution franchise, widened its
product and customer mix, and gives it the
Platform to aggressively expand its balance-sheet; which it has hitherto achieved quite well. It is
predominantly a Consumer bank – with almost 70% of its loans are in relatively high yield
segments. Its distribution concentration is largely in the Western and Northern parts of the
country, and it is seeking to acquire a mid-sized bank in the Southern parts of the country, to
broaden and expand its distribution franchise. Bank Muscat is the largest shareholder in the bank
post-merger with a 20.5% stake; Keppel Corp holds 9.0% and 18.6% is held through GDRs.
Sabre Capital and BOP promoters hold 4.4% and 5.0%stakes in the bank, respectively.
HDFC Bank and Centurion Bank of Punjab have decided to merge. It is the largest merger in the
space in recent times and perhaps the beginning of the consolidation wave in the BFSI sector.
The HDFC Bank-CBOP merger is a smooth exercise when it comes to the marriage of
technology at both banks. The merger comes as no surprise. With further liberalization, post-
2009, an account of WTO regulations, there would be greater accessibility for foreign banks to
Indian shores and vice-versa. With competition hotting up, Indian Banks will have to gear up to
compete with their global counterparts in terms of products, technology and people.
8. MERGER OF HDFC BANK WITH CENTURION BANK OF PUNJAB
Merger with Centurion Bank of Punjab in the swap ratio of 1:29
The boards of both HDFC Bank and Centurion Bank of Punjab (CBOP) have approved the
merger between the two banks in the ratio of 1:29(1 share of HDFC Bank for 29 shares of
CBOP) HDFC bank would also consider selling shares to HDFC in order to maintain its holding
over 20%. We rate this merger as neutral for HDFC Bank on as a long term perspective.
However on a short term basis, it is negative for HDFC Bank’s stand-alone financials and
shareholders
At the current price, the CBOP’s is richly valued compared with that of HDFC bank despite
CBOP’s lower banking franchise, inferior return ratios and higher NPAs. CBOP’s asset book
constitutes about 20% of that of HDFC Bank; while its profit is merely 11%.Following is a
summary of the key business parameters across HDFC Bank and CBOP.
Shareholding pattern of HDFC Bank on 31Dec 2007
Face value 10.00
Promoter’s holding
No. of shares % of holding
Indian Promoters 82443000 23.28
Subtotal 82443000 23.28
Non Promoter’s holding
Institutional Investors
Banks Fin. Inst. And Insurance 10068939 2.84
FII’s 94087619 26.57
Subtotal 116142534 32.80
9. Other Investors
Private Corporate Bodies 28598234 8.08
NRI's/OCB's/Foreign Others 6019811 1.70
Govt 3841342 1.08
Others 78110019 22.06
Subtotal 116569406 32.92
General public 38920380 10.99
Grand total 354075320 100.0
Shareholding pattern of CBoP on 31Dec 2007
Face value 1.00
Promoter’s holding
No. of shares % of holding
Subtotal N.A N.A
Non Promoter’s holding
Institutional Investors
Banks Fin. Inst. and Insurance 1142025 0.06
FII's 501898631 26.80
Subtotal 512107247 27.34
10. Other Investors
Private Corporate Bodies 782415732 41.77
NRI's/OCB's/Foreign Others 13299320 0.71
Directors/Employees 11080829 0.59
Others 287341856 15.34
Subtotal 1093907310 58.40
General public 266724046 14.24
Grand total 1872738603 99.99
Main Highlights of Merger
• The merger was effected using the ‘pooling of interest’ method. The bank’s main task
was to harmonize the accounting policies and, as a result, HDFC Bank took a hit of Rs. 7
bn to streamline the policies of erstwhile CBoP itself. Of this Rs. 7 bn, around 70% went
toward the harmonization of accounting policies relating to loan- loss provisioning and
depreciation of assets, and the balance 30% reserves write-offs were toward the merger-
related restructuring costs like stamp duty, HR and IT integration expenses.
• The loan book size of erstwhile CBoP was close to Rs. 150 bn, largely constituted by
retail loans with only around 15% of corporate loans. In terms of asset quality, the gross
NPAs at the end of March2008 were around 3.8% and net NPAs at around 1.7%. The
harmonizing was done to bring in more stringent provisioning requirements for
identifying NPAs as the existing norms of the erstwhile CBoP were comparatively more
relaxed. The duration of CBoP’s lending portfolio is around 18-20 months so the risk of
incremental slippage would continue in near future; however the bank is confident of its
strong recovery management process and anticipates lesser pain.
11. • The CASA ratio at the end of June 2008 was 45%. This in line with expectations of
analysts as CBoP had a much lower CASA ratio of around 25% compare to 56% of Pre-
merged HDFC Bank. By the end of the year, the target CASA ratio is around 47-48%.
This would primarily be driven by an increasing contribution of low-cost deposits from
the erstwhile CBoP’s branches.
• Of the total non- interest income of CBoP, fee income constituted around 50% which was
generated mainly through distribution of insurance products (Aviva) and from processing
fees. In line with regulatory and operational issues, these streams of income have
temporarily been discounted. This aspect act as a drag on the ‘other income’ of the
merged entity and it would take 2-3 quarters for the issues to be addressed. Till these
issues are resolved positively, the ‘other income’ growth (primarily the fee income)
would remain muted for the merged entity.
• The cost/income ratio of the merged entity has increased to around 56% from 50% levels
for standalone HDFC Bank. The increase was expected as CBoP’s C/I ratio was around
60%. HDFC Bank has retained almost all the employees of CBoP and expects to achieve
full synergies and efficiencies, in terms of the restructured HR and IT processes, in the
next 2-3 quarters. This means that by Q4FY09, the entire workforce would be working at
full efficiency levels as that of the existing bank and the technology and IT-platforms
would be completely integrated to support efficient performance. The aim is to reduce C/I
ratio to around 52-53% by the end of FY09.
KEY BUSINESS PARAMETERS (Rs Million)
12. HDFC BANK DEC-07 CBOP DEC-07
Branches (Nos) 754 394
ATM (Nos) 1906 452
Customer A/C (M) 10 2
Debit cards (m) 5.0 1.1
Credit cards (M) 3.5 0.2
LIABILITIES
Deposits 993,869 207,100
CASA Deposits 505,630 50,740
CASA Ratio % 51 25
Share capital 3,541 1,873
NETWORTH 113,584 19,633
Other liabilities 206,942 27,306
Total liabilities 1,314,395 254,309
ASSETS
Advances 713,868 150,835
Retail 364,073 90,228
Other assets 600,527 103,204
Goodwill
TOTAL ASSETS 1,314,395 254,309
13. NET NPAs 2,798.0 2544.0
CBoP Trades at a premium to HDFC Bank (as on December 2007)
CBoP’s current valuations are significantly higher versus HDFC Bank when compared on
traditional valuation parameters such as P/BV and P/E. However, on franchise-based valuation
parameters, the valuation appears comparable.
COMPARATIVE VALUATIONS
HDFC Bank Dec 2007 CBoP Dec 2007
Price as per agreed swap ratio (Rs) 1,475 51
Fully Diluted MCAP (M) 524,658 112,158
Current P/BV (Dec-07) 4.6 5.7
FY08E
BV Rs 333.9 11.8
EPS Rs 45.6 1.0
P/B (X) 4.4 4.3
P/E (X) 32.3 51.4
14. ROE % 17.7 10.6
FY09E
BV Rs 382.8 12.8
EPS Rs 63.0 1.3
P/B (X) 3.9 4.0
P/E (X) 23.4
38.7
ROE % 17.6 10.9
Franchise Based Valuation
MCAP/Branch Rs (m) 695.8 284.7
MCAP/customer A/C (E) Rs 52,465.8
44,863.3
MCAP/total deposits (X) Rs 0.5 0.5
MCAP/CASA Deposits (X) 1.0
2.2
MCAP/ Total Assets (X) 0.4 0.4
AFTERMATH OF THE MERGER
A. Branch expansion/Size – likely determinant of the merger
The biggest benefit to HDFC Bank from this acquisition would be addition of 394 of CBoP’
branches [which are concentrated in the states of NCR (55), Punjab (78), Haryana’s(28),
15. Maharashtra (39) and Kerala (91)]. About 60% of CBoP’ advances are to retail (v/ss~50% for
HDFC Bank) with dominance in the areas of mortgages, personal loans, 2-wheelers and
commercial vehicles (CVs).
Both banks earn higher net interest margins — HDFC Bank is at 4%+ and CBoP is at ~3.6%.
Moreover, the banks have a similar business model and philosophy underlined by a thrust on
branch network expansion, retail assets, high margin business and strong fee income sources.
B. HDFC Bank would emerge as the biggest private bank in terms of branches
HDFC Bank has always maintained that fast branch expansion is a key ingredient that will
sustain its high CASA deposits and margins. This merger with CBoP would result in the
combined entity having 1148 branches at present, which is the largest branch distribution
network for a private bank in India (ICICI Bank currently has 955 branches). This apart, HDFC
Bank would gain dominance in states like Punjab, Haryana, Delhi, Maharashtra and Kerala.
C.Positive aspects of the merger:
(1) increased footprint and metro presence;
(2) cost-income ratio has room for improvement;
(3) Enhanced management bandwidth to enable entry in to International business; and
(4) Both banks have senior managements of high caliber who have worked with Citigroup at
some point in their career.
Negatives:
(1) Merger likely to be EPS dilutive for the next two years, due to valuations; and
(2) Integration of LKB branches may pose a challenge.
16. Major benefits accruing from the merger:
• Wider distribution reach: 32% of CBoP branches are in metros
The merger will add close to 394 branches to HDFC Bank’s network of 750 branches, almost
50% increase in the existing network, while adding close to 19% to its asset base. HDFC Bank’s
branches are currently spread throughout the country, whereas CBoP has a strong presence in
Punjab, Maharashtra, and with the acquisition of LKB, now in Kerala as well. In view of RBI’s
stringent license policy, metro licenses have been hard to come by for most banks.
With the merger, HDFC Bank’s metro branches will increase by 44% in one shot, while its non
metro branches will increase by 57%.
Table 1: Expanding metro reach by 44%
CBoP HDFC
Metro 127 287
Non Metro 267 467
Metro Proportion 32% 38%
Non Metro Proportion 68% 62%
Chart 1: HDFC Bank to be largest private sector bank in terms of branch network
17. Table 2: More number of branches would lead to reduced cost of funds
FY08E FY09E FY10E
No of branches 1,148 1,398 1,598
CASA Ratio 48.4 48.4 48.9
CASA per Branch 477 540 663
18. Business per Branch 915 870 1,117
Cost of Funds 5.0 4.9 4.
• Scope to enhance productivity
CBoP’s, as a standalone bank, cost to income ratio is high at 63%; however, merging with a
larger organization like HDFC Bank gives significant scope for operating leverage with
economies of scale. There is also scope for improvement in utilization ratios with improvement
in branch and employee productivity to near HDFC Bank’s levels.
Table 3: Scope for improved utilization of branches
INR mn HDFC Bank CBoP Merged
entity
Business/branch 2,289 908 1,812
Business/employee 80 65 77
Assets/branch 1,762 645 1,376
Assets/employee 61 46 58
19. PAT/branch 24 5 17
PAT/employee 0.8 0.3 0.7
• complementary Overlay
CBoP has traditionally been strong in high yielding SME and retail segments, while HDFC Bank
has an enviable retail deposit franchise. With the merger, CBoP’s ability to grow its loan book
will complement HDFC Bank’s deposit franchise. On the product portfolio side, both the banks
have a strong foothold in vehicle financing, which is a natural synergy.
Chart 2: Retail loan break up
20. Higher productivity to help HDFC Bank bring down cost to income ratio
Improvement in productivity levels will help HDFC Bank lower CBoP’s cost to income ratio
over the medium term. High cost to income ratio, mainly due to lower productivity of some
merged branches and employees, has played a big role in restraining CBoP’s return ratios.
• Strong and experienced management team: HDFC Bank may add international
business
CBoP has a strong and experienced management team. The management has demonstrated its
capability to integrate diverse organizations by successfully reaping synergies of the merger with
21. Bank of Punjab. We expect the CBoP team to strengthen HDFC Bank’s management bandwidth
and consequently the latter may add international banking to its services kitty.
Table 4: Senior management team of HDFC Bank
Name Position
Mr. Aditya Puri Managing Director
Mr. Vinod G. Yennemadi Head, Finance, Administration, Legal and
Secretarial
Mr. Harish Engineer Head, Wholesale Banking
Mr. Sudhir Joshi Head, Treasury
Mr. C. N. Ram Head, Information Technology
Mr. Bharat Shah Head, Merchant Services
Mr. G. Subramanian Head, Audit, Compliance and Vigilance
Mr. Paresh Sukthankar Head, Credit and Market Risk and Human
Resources
Mr. A. Rajan Head, Operations
Mr. Abhay Aima Head, Equities and Private Banking and Third
PartyProducts
Mr. Kaizad Bharucha Head, Credit and Market Risk
Mr. Pralay Mondal Head, Retail Assets and Credit Cards
Ms. Mandeep Maitra Head, Human Resources
22. Mr. Ashish Parthasarthy Head, Trading
Mr. Rahul N. Bhagat Head, Retail Liabilities and Marketing
Mr. P.V. Ananthakrishnan Head, Capital Markets and Commodity
Business
Mr. Bhavesh Zaveri Head, Wholesale Banking Operations
Mr. Aseem Dhru Head, Business Banking and Commercial Transportation
Group
Mr. Shyamal Saxena Head, Branch Banking
Mr. Navin Puri Head, Branch Banking
Mr. Jimmy Tata Head, Corporate Banking
Mr. Sashi Jagdishan Head, Finance and Administration
23. Near term performance likely to be muted; benefits to accrue over medium term
The merger is positive from a strategic perspective; however, from minority shareholders’
perspective it is EPS dilutive, at least till FY09E. Consequently, we believe that near term stock
performance is likely to be capped due to this EPS dilution. With better utilization of branches
and rationalization of employees with organic expansion of business, the merger is likely to be
EPS neutral in FY10E. Upside risks exist in the form of sooner-than-expected merger synergies.
We expect 34% growth in balance sheet and 37% growth in EPS CAGR over FY08-10E. The
proposed issuance to HDFC is likely to provide adequate capitalization and enable strong
organic expansion over the next two years. The stock is trading at 3.0x FY10E adjusted
book(post merger) and 19.0x FY10E earnings
POST MERGER CONSOLIDATION
24. At a swap ratio of 1:29, it would lead to dilution of 21% for HDFC Bank. HDFC Bank would
issue 76m shares ( fully diluted) to CboP shareholders.The merger would worsen HDFC Bank’s
RoEs, CASA ratio and asset in the near term and make valuations additionaly
expensive.Presented belo is a snapshot of the merged entities
POST MERGER SNAPSHOT (Rs M)
HDFC Bank CBOP Merged
(Dec 07) (Dec 07) (Dec 07)
Branches Nos 754 394 1148
ATM Nos 1906 452 2358
Liabilities
Deposits 993,869 207,100 1,200,969
CASA Deposits 505,630 50,740 556,730
CASA Ratio(%) 51 25 46
Share Capital 3541 1873 4301
Net Worth 113,584 19,633 225742
Net worth net of goodwill
25. Other liabilities 206,942 27,306 234,248
Total liabilities 1,314,395 254,039 1,660,959
Total liabilities Ex Goodwill 1,314,395 254,039 1,660,959
Assets
Advances 713,868 150,835 864,703
Retail 364,073 90,228 454,301
Other assets 600,527 103,204 703,731
Goodwill 92,525
Total Assets 1,314,395 254,039 1,660,959
Total Assets Ex Goodwill 1,314,395 254,039 1,660,959
Net NPA (%) 0.4 1.7 0.6
Net NPAs (Rs m) 2,798.0 2,544.0 5,342.0
FY07 PAT (Rs.m) 11,415 1,214 12,629
FY08E PAT (Rs.m) 16,211 1,966 18,176
FY07 RoE (%) 17.7 10.6 1
26. analysis
BASES FOR DETERMINING EXCHANGE RATIO
Valuations based on 31, Dec 2007
1.Market Price Method
SER=Market Price of CBoP
Market Price of HDFC Bank
SER= 51
1475
SER= .0003458
No. of shares to be exchanged=SER X Pre merger no. of shares of CboP
NSE= .0003458 x 18,730lacs
NSE= 6.476834lacs
27. No of shares after merger= Equity shares of HDFC Bank + No. of shares to be exchanged
No. of shares after merger = 3,541 lacs + 6.47683 lacs
No. of shares after merger= 3547.4768 lacs
Post merger combined EPS= PAT of HDFC Bank + PAT of CboP
No. of shares after merger
Combined EPS= 11,415(m) + 1,214(m)
3547.4768 lacs
Combined EPS= 12,629(m)
354.74768(m)
Combined EPS= 35.599
Note: The market price taken above, the price at which swap ratio is actually calculated.
28. 2.Earning per share
SER= Earning per share of CboP
Earning per share of HDFC Bank
Earning per share (EPS) = Profit after tax
No. Of shares outstanding
EPS of CboP = 1,22.920(crore)
187.3(crore)
EPS of CboP = .67
EPS of HDFC Bank = 1119.07(crore)
35.408(crore)
EPS of HDFC Bank = 31.6
29. SER = .67
31.6
SER= .021
That means 21 shares of HDFC Bank will be exchanged for 1000 shares of CboP.
3.Net Asset Value Method ( Based on 31, march 2007)
NAV per share = net worth of company
No. Of outstanding shares
Net worth of CboP = company’s share capital + reserves & surplus
Net worth of CboP= 156.69 crore + 1239.41 crore
Net worth of CboP= 1396.1 crore
No . of outstanding share = 156.69 crore
NAV per share = 1396.1crore
156.69 crore
NAV per share = 8.909
Note : Par value per share is 1
30. 4.EBITDA multiple= Enterprise value ( Based on 31, march 2007)
EBITDA
Where,
Enterprise value = Market value of equitty + Market value of debt
EBITDA = Earning before interest, tax, depreciation and amortization
Market value of equity = market price * no. of outstanding shares
Market value of equity of CboP= 59.10 *156.69 crore= 9260.38 crore
Market value of Debt of CboP = 14,863.72 crore
Enterprise value of CboP= 24,124.10 crore
EBITDA = 1,646.53 crore
EBITDA Multiple = 24124.10 = 14.65
1,646.53
Note: Closing price of CboP(NSE) on 31, dec 2007 was Rs. 59.10
Sales Multiple = Enterprise value
31. Net sales of curent year
Enterprise value of CboP= 24,124.10 crore
Net sales on march, 2007 = 1268.53 crore
Sales Multiple= 24,124.10 = 19.017
1,268.53
CONCLUSION
Summarizing the above results
Market price method EPS method EBITDA multiple of CBoP
SER= .0003458
SER= .021 14.65
Net asset value method
SALES multiple of CboP
NAV per share (CboP)
19.017
8.909
32. HDFC Bank gearing for competition (would become 2nd largest)
ICICI Bank, the largest private sector bank in the country, is likely to open around 425 new
branches by June 2008, taking its total tally to 1,380. HDFC Bank, which currently has 754
branches and approval for 200 other branches, is in for stiff competition from ICICI Bank its
peers who are eager to increase their share in the low cost deposit base. Hence, the current
merger will catapult HDFC Bank with the highest network among private banks.
Additional branches counter balance high deal value
At times when branch licences are difficult to come by and with the possibility of the sector
opening up to foreign competition post March 2009, leading domestic private banks are unlikely
to sit idle. There is high possibility that these banks scale up their reach through the organic and
inorganic route. We feel CBoP’s major presence in the northern part of the country (in Punjab
post its merger with Bank of Punjab) and in the south (post its acquisition of Lord Krishna Bank)
gives HDFC Bank sufficient room to
Leverage these branches going ahead.
33. Profitability and return ratios to be affected
HDFC Bank’s NIM at 4.5% is much higher than CBoP’s 3.6%, hence we expect NIM of the
merged entity to decline in the medium term, but show improvement once HDFC Bank is able to
leverage branches optimally. HDFC Bank’s productivity and profitability ratios are among the
best in the industry, which is also expected decline in case of the merged entity.
ANNEXURES
Standalone Financials
HDFC Bank
Income statement (Rs. Million)
Y/E March 2007 2008E 2009E 2010E
34. Interest income 66,479 101,515 143,045 187,147
Interst Expended 31,795 49,832 69,432 90,704
Net Interest Income 34,685 51,682 73,614 96,444
Change (%) 50.8 49.0 42.4 31.0
Other Income 15,162 23,061 27,791 35,506
Net Income 49,847 74,743 101,405 131,950
Operating Expenses 24,208 36,984 50,553 65,824
Operating income 25,639 37,760 50,852 66,125
Change(%) 47.9 47.3 34.7 30.0
Other Provisions 9,252 13,921 17,912 22,057
PBT 16,388 23,839 32,941 44,068
Tax 4,973 7,629 10,541 14,10
Tax Rate % 30 32 32 32
PAT 11,415 16,211 22,400 29,966
Change (%) 30.8 42.0 38.2 33.8
Proposed Dividend 2,236 3,201 4,268 5,691
BALANCE SHEET (Rs.
Million)
Y/E MARCH 2007 2008E 2009E 2010E
Capital 3,194 3,557 3,557 3,557
39. Mann- Whitney U Test:
Parameters HDFC Rank CBoP Rank
Net Profit Margin (%) 13.57 17 7.25 9
Return on Net Worth 17.74 19 8.69 11
Return on Long-Term 74.91 24 64.29 22
Funds
Total Debt/ Equity 8.60 10 10.65 13
Reported EPS 35.74 21 0.82 2
Book Value (excluding
Revenue Reserve per
201.42 26 8.75 12
Share)
Capital Adequacy Ratio 13.08 16 11.05 14
Demand Deposits to
40. Total Deposits 29.00 20 15.21 18
Operating Income per 12.14 15 4.30 5
Branch
Financials Expenses per 4.65 8 1.66 4
Branch
Advance/ Deposit Ratio 68.70 23 75.49 25
Net NPA (%) 0.40 1 1.26 3
Net Interest Margin (%) 4.50 6 4.61 7
Total Ranks 206 Total Ranks 145
To apply the Mann- Whitney U Test to this problem, we began by ranking all the parameters
(considering both the banks together), from lowest (Rank 1) to the highest (Rank 26).
The symbols used in the Mann- Whitney test in context of this problem are:
n1= Number of items for HDFC Bank, = 13
n2= Number of items for CBoP, = 13
41. R1= Sum of the Ranks of the items in HDFC Bank, = 206
R2= Sum of the Ranks of the items in CBoP, = 145
Calculating the U Statistic:
We can determine the U Statistic, a measure of the difference between the ranked observations of
the two samples, by using the above values of n1, n2, R1, and R2.
U = n1*n2 + [n1*(n1+ 1)/ 2] – R1
U = 13*13 + [13*(13+1)/ 2] – 206
= 54 (U Statistic)
If the null hypothesis that the (n1 + n2) observation from identical populations is true, this
U statistic has a sampling distribution with a Mean of:
µU = (n1*n2)/ 2
µU = (13*13)/ 2
= 84.5 (Mean of the U Statistic)
42. and Standard Error of:
σU = √ [n1*n2*(n1+n2+1)/ 12]
σU = √ [13*13(13+13+1)/12]
= 19.5 (Standard Error of the U Statistic)
Testing the Hypothesis:
The sampling distribution of the U statistic can be approximated by the normal distribution when
both n1 and n2 are larger than 10. Because our problem meets the condition, we can use the
standard normal probability distribution table to make our test.
Assuming, the level of significance (α) to be 0.05 (95% confidence intervals), and testing the
hypothesis that these two samples were drawn from identical population
H0: µ1 = µ2 (Null Hypothesis: There is no difference between the two populations, so
they have the same mean)
H1: µ1 ≠ µ2 (Alternative Hypothesis: There is a difference between the two populations,
in particular, they have different means)
α = 0.15 (Level of Significance for testing the Hypothesis)
43. Since, we want to know that the mean score of either of the banks is better or worse than the
other; this is a two- tailed hypothesis test. As the level of significance is 0.05, the level of
significance on either side of the curve will be 0.025 (on both sides). Thus, the remaining value
of acceptance on either side will be, 0.5- 0.025= 0.475.
Now, we can determine critical z value from Appendix Table I.
The critical z value for an area of 0.475 is 1.96(z = +1.96, z = -1.96)
Now, using the equation to standardize the sample U statistic,
z = (U – µU)/ σU
= (54- 84.5)/ 19.5
= -1.564
Since, the acceptance region is from -1.96 to +1.96, and the calculated value of z lies within the
region (within the critical values of the test),
we conclude that the distributions and the means of two samples are same.
