HDFC Bank Board on 25th February 2008 approved the acquisition of Centurion Bank of Punjab (CBoP) for Rs 9,510 crore in one of the largest merger in the financial sector in India. CBoP shareholders will get one share of HDFC Bank for every 29 shares held by them.
This will be HDFC Bank's second acquisition after Times Bank. HDFC Bank will jump to the 7th position among commercial banks from 10th after the merger. However, the merged entity would become second largest private sector bank. The merger will strengthen HDFC Bank's distribution network in the northern and the southern regions. CBoP has close to 170 branches in the north and around 140 branches in the south. CBoP has a concentrated presence in the in the Indian states of Punjab and Kerala.
The combined entity will have a network of 1148 branches. HDFC will also acquire a strong SME (small and medium enterprises) portfolio from CBoP. There is not much of overlapping of HDFC Bank and CBoP customers. On the first trading after swap announcement, equity shares of both the bank fell, CBoP by 14.45% (Rs. 48.25) while shares of HDFC Bank fell by 3.54% (Rs 1422.70). The banking index fell by 0.37% (Rs 2586.70) on the same day. Incidentally the shares of HDFC had risen marginally by 0.49%. The merger will dilute the holding of HDFC in HDFC bank from 23.28% to around 19%. The former has initiated steps to issue preferential allotment of HDFC Bank's shares, infusing additional Rs. 78 Billion.
After this merger HDFC would move up from the present 10th position in terms of assets to 7th position, as the merged entity is expected to have advances of Rs. 850 Billion. The deposits are likely to be around Rs. 1,200 Billion. The balance sheet of HDFC will move up by Rs. 1,500 Billion. HDFC will be adding 450 branches and substantially improving its presence in southern part of India where CBoP has 170 outlets. The major business calculation of HDFC bank seems to stave of challenge posed by Axis bank and also to rapidly expand lending portfolio to the small and medium enterprises.
EXCHANGE RATIO: 1:29
TYPE OF MERGER: Amalgamation
CLOSING PRICE: Rs.1422
Concept Used
The concept used in this deal was "Amalgamation". In this case there is an arrangement, where the assets and liabilities of two or more companies become vested in another company (which may or may not be one of the original companies) and which would have as its shareholders substantially, all the shareholders of the amalgamating companies. In this deal the two companies were Centurion Bank and Bank of Punjab which was merged together to form Centurion Bank of Punjab and now this entity is being merged into HDFC.
Objectives of Merger
Significant synergies to the combined entity.
Improve the franchise and customer proposition offered by the individual banks.
Strong Leadership position in market.
Large nationwide network
Focus on technology and superior margins
Largest branch network among private banks.
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 hundreds of Indian 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 asset quality.
As on March 31, 2008, the Bank had a network of 761 branches and 1,977 ATMs in 327 cities. For the year ended March 31, 2008, the bank reported a net profit of Rs.1590.2crore up 39.3%, over the corresponding year ended March 31, 2007. As of March 31, 2008 total deposits were Rs.100, 769 crore up 47.5% over the corresponding year ended March 31, 2007. Total balance sheet size too grew by 46.0% to 133177 crore.
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 a strong player in foreign exchange services, personal loans, mortgages and agricultural loans. Additionally the bank offers a full suite of NRI banking products to overseas Indians.
On 29th August 2007, Centurion Bank of Punjab merged with Lord Krishna Bank (LKB), post obtaining all requisite statutory and regulatory approvals. This merger has further strengthened the geographical reach of the Bank in major towns 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 404 branches and 452 ATMs in 190 locations across the country, supported by employee base of over 7,500 employees. In addition to being listed on the major Indian stock exchanges, the Bank's shares are also listed on the Luxembourg Stock Exchange.
Value Creation
It consists of a set of activities, which cause and/or establish the value. The strategically important functions of an organization are identified, which create value for the customer. It is based on the idea that each enterprise is an accumulation of activities. All these activities can be represented in a value chain.
Banking approach is changing and being reshaped in line with the global variables in the new world order. Competition makes the banks, which can be regarded as building units of economy in an intensive business market, to adopt themselves to the general and organizational changes and run businesses in the way required by the contemporary age. In the case of HDFC & CBoP, the merger has positioned the combined entity to significantly exploit opportunities in a market globally recognized as one of the fastest growing place. The bank today has a large nationwide network, an extremely valuable franchise, talented employees, and strong leadership positions in the market place. The merger with HDFC Bank has created a world class bank in quality and scale and had also set the stage to compete with banks both locally as well on a global level. The HDFC Bank-CBoP merger is a win-win for both banks in terms of both asset size and footprint, as the market gets competitive by the day. While CBoP is concentrated in the northern and southern parts of the country, HDFC Bank is focused throughout India.
Post Merger
The inherent synergies of HDFC Bank and CBoP in their retail focus was the driver for the merger, which added around 400 branches to HDFC Banks' branch strength of 760 (as on March 2008) along with a 15-20 per cent increase in the asset base to more than Rs 1.7 lakh crore. While the merger has helped increase the size of HDFC Bank, it has also led to some pressure on key ratios for the combined entity; CBoP ratios were lower than that of HDFC Bank. The next pertinent question was the pace of integration, and how fast HDFC Bank can ramp up efficiency levels of CBOP to its own benchmarks.
MERGER EFFECTS
Rs crore
CBOP **
9 Mths
HDFC Bank**
9 Mths
Standalone
FY 08
Post-merger
H1 FY09
Net Int. Income
505
3,586
5,228
3,590
Other Income
459
1,734
2,283
1,237
Net Profit
123
1,119
1,590
992
Cost/income (%)
63.0
49.7
49.9
55.4
NIM (%)
3.6
4.3
4.4
4.2
CASA (%)
24.5
50.9
55
44.0
Net NPA (%)
1.7
0.4
0.5
0.6
CAR (%)
11.5
13.8
13.6
11.4
** Pre-merger and for nine months ended December 2007
EPS, MPS & Exchange Ratio
Particulars
Premerger
Post Merger
HDFC
CBoP
HDFC-CBoP
EPS (Rs)
44
35
55
PE ratio
33
22
26
MPS ( PE * EPS)
1452
770
1430
Exchange Ratio:
MPS of CBoP /MPS of HDFC
770/1452
Exchange Ratio (ER)
0.5303
