T YPES OF MERGER
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Multiple reasons force us to believe that M&A in the Indian
Banking Sector is an imperative. We list them down below:
Stability:
Fr a g m e n t a t i o n p o s e s i n c r e a s i n g r i s k i n t h e I n d i a n B a n k i n g
S e c t o r. D u r i n g t h e f i n a n c i a l p e r i o d 2 0 01 - 2 0 0 5 , o n l y f o u r b a n k s
have been able to cross the market capitalization of Rs. 50
billion included Bank of Baroda, HDFC Bank, ICICI Bank, and
State Bank of India. Considerable fragmentation exists in the
Banking sector for banks with market capitalization of less than
Rs. 50 billion. Moreover the created value is moving away from
the top 5 banks thus indicating fragmentation indeed has
increased over the period of last five years. Shown below are the
deposit shares of the Banks operating in India over the period
2000-2004. Data was drawn from around 45 banks which
included state-controlled public sector banks, private sector
banks and even foreign banks operating in India. It is obser ved
that the share of the top 5 players has eroded and been
consumed by the next fif teen players. Considering that the base
of total deposits has been consistently increasing, consequently
the value in deposits gained by the next 15 banks has been
tremendous (see table below).
Ye a r 2 0 0 0 2 0 0 4
Similar trends are obser ved in profit af ter tax, borrowings and
interest and non interest incomes of the banks, thereby hinting
at increased levels of fragmentation in the top 20 banks. Though
this could be the sign of a competitive bank market with healthy
banks remaining in the market the goal of globally competent
banks would be missed. In other words, while a fragmented
Indian banking structure may ver y well be beneficial to the
customers (given increased competition due to lower market
power of existing players), at the same time this also creates the
problem of no player having the critical mass to play the game at
the global banking industr y level. This has to be looked at
significantly from the state’s long- term strategic per spective.
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Fu r t h e r m o r e , i t i s o b s e r v e d t h a t i n a n i n c r e a s i n g c o m p e t i t i v e
arena the smaller fragmented banks with no economies of scale,
low capabilities to manage risks and poor market power at times
end up taking excessive risks resulting in irreparable loss to their
depositors. This also results in af fecting the state and its
r e g u l a t o r ’ s i . e . , c e n t r a l b a n k n e g a t i v e l y. Ta k e t h e f o l l o w i n g c a s e s
of trouble in the recent past:
a . G l o b a l Tr u s t B a n k : S i g n i f i c a n t e x p o s u r e t o h i g h r i s k m i d s i z e
corporates and an excessive exposure to capital market
operations.
Fu r t h e r r e c e n t c a s e s ( i n 2 0 0 5 - 0 6 ) o f t w o b a n k s i n I n d i a n a m e l y
United Western Bank and Sangli Bank became attractive targets
for acquisition by private sector banks because of their risk
profile. The merger with these larger banks is expected to
i m p r o v e t h e a s s e t p r o f i l e , N PA m a n a g e m e n t a n d p r o t e c t t h e
depositors at the same time of fer the acquiring private sector
banks further reach in terms of branches and customer base.
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A small analysis of per formance of the bank sector and the
equity market benchmark index in India and USA showed the
following results:
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Adhering to the International CAR norms and Supporting
Regulator y Framework:
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Average Capital Adequacy Ratio of Banks in India
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Bottom Line Growth:
3 . S y n e r g y B e n e f i t s : Tr e a s u r y p e r f o r m a n c e w o u l d b e i m p r o v e d
as the cost of funds would reduce (hence, improve spread) as it
would have a better credit rating. A bank would also be able to
leverage scale and improve its trading income.
Tw o p r i m e r e a s o n s f o r c e u s t o b e l i e v e t h a t M & A i n t h e I n d i a n
B a n k i n g S e c t o r i s a n o p p o r t u n i t y.
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A recent trend is to promote the concept of a financial super
market chain, making available all types of credit and non-fund
facilities under one roof under one umbrella organization (or
through specialized subsidiaries).
An example of such a financial supermarket would be the reverse
merger of ICICI and ICICI Bank . ICICI Bank today stands as
India’s second largest bank of fering its clients both in India and
overseas a product range as varied us retail banking products to
e x o t i c i n v e s t m e n t b a n k i n g a n d t r e a s u r y s o l u t i o n s . S i m i l a r l y, I D B I
and IDBI Bank treaded the same route. Though one has to state
that consolidated accounting and super visor y techniques would
have to evolve and appropriate fire walls built to address the
risks underlying such large organizations and banking
conglomerates.
Tec h n ol og ic a l Ex p e r t is e:
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Cross Border M&A in Banks
One more reason for M&A which has sprung up in the recent
years is Indian Banks seeking international presence. In the last
two decades, there has been a jump in the Indian diaspora
working abroad. A new recent trend is the increase in the interest
of foreign expats to work in India. Both these communities seek
banking products in remittances and other cross border retail
p r o d u c t s . Fu r t h e r f i r m s a r e l o o k i n g f o r f u n d s o v e r s e a s f o r v a r i o u s
purposes ranging from capital expenditure to leveraged M&A
financing. Hence, Indian banks are setting up branches and
subsidiaries overseas and foreign banks are expanding their
operations in India. These bank branches (set up abroad) further
target the local population to be profitable and hence target
l o c a l a c q u i s i t i o n s . E v i d e n t l y, t h i s r e s u l t s i n a n M & A o p p o r t u n i t y
for Foreign Banks to acquire an Indian Bank and also Indian
Banks to acquire foreign banks. For example, ICICI Bank has
made an acquisition of a bank in Europe in 2006 to establish
itself in a geographical area.
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− The Foreign Exchange Management Act, 1999
− The Foreign Investment Promotion Board (FIPB)
− The Reser ve Bank of India
− The I n c o m e Ta x A c t , 1 9 61
M E R G E R O F S TAT E B A N K O F I N D I A A N D S TAT E B A N K
OF SAURASHTRA
SBS is the smallest of the seven associates. The other associates
a r e S t a t e B a n k o f Tr a v a n c o r e , S t a t e B a n k o f M y s o r e , S t a t e B a n k
o f B i k a n e r a n d J a i p u r, S t a t e B a n k o f H y d e r a b a d , S t a t e B a n k o f
Indore and State Bank of Patiala.
SBS has 460 branches and the merger would help eliminate
duplication of branches in the same area. Its net profit rose 45
p e r c e n t t o R s 8 7. 4 c r o r e i n 2 0 0 6 - 07. T h e b a n k h a s p a i d - u p e q u i t y
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c a p i t a l o f R s 31 4 c r o r e . T h e t o t a l d e p o s i t s s t o o d a t R s 1 5 , 8 0 4
crore while total advances were at Rs 11 ,081 crore.
The merger comes at time when the bank has decided to go in for
big expansion. The bank is also looking at freeing up capital by
setting up a holding company for its life insurance and asset
management businesses. SBI’s move to merge its arms could
p a v e t h e w a y f o r f u r t h e r c o n s o l i d a t i o n i n t h e i n d u s t r y, w h i c h
faces imminent competition from foreign banks from 2009.
Buyer
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finance, securities brokerage and investment banking, insurance
agency and brokerage ser vices, computer and data processing
ser vices, trust ser vices, investment advisor y ser vices and venture
capital investment. It operates in three segments: Community
Banking, Wholesale Banking and Wells Fargo Financial.
Ta r g e t
Wells fargo & co the biggest US bank on the west coast, agreed
to buy of Wac hov ia corp for about $1 5.1 bn in stoc k , trumping
C i t i g r o u p ’ s o f f e r f o r e m b a t t l e d N o r t h C a r o l i n a l e n d e r.
T h i s d e a l w o u l d b e e x e c u t e d e n t i r e l y b y We l l s Fa r g o w i t h o u t h e l p
of US unlike citigroup’s of fer which relied on financial backing
from the Federal Deposit Insurance Corp.
R AT E O F R E T U R N
W e l l Fa r g o s a i d i t w i l l a c q u i r e a l l o f Wa c h o v i a ’ s b u s i n e s s e s
preferred equity and banking deposits. Bank claimed that the
acquisition will add to earnings per share by the third year af ter
completion and should produce internal rate of return of at least
15 %.
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Buying Wac hov ia is a detour from the strategy was outlined by
W e l l s F a r g o . A f t e r a c q u i r i n g W a c h o v i a W e l l s Fa r g o w o u l d h a v e
$ 1 . 4 2 t r i l l i o n i n a s s e t s , $ 7 8 7 b i l l i o n i n d e p o s i t s a n d 1 076 1
branches.
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