Consolidation in Indian Banking Industry - The M&A way

Team E
Mulyankan 2010
Contents

 SWOT Analysis and Challenges

1. Banking Industry Analysis
 Why Consolidation

 Geographical and other Synergies

2. Basis of Selecting Banks
 Strength of merged entity

 Bank of Baroda and Syndicate Bank

3. Key Projections
 Consolidated

 Assumptions
ns4. Valuation
 Calculations

5. Strength of merged Entity  Key Ratios

6. Potential Vulnerabilities  Issues faced by merged entity

SWOT of Indian banking Sector

• Low development of structured • Favorable

products. Macroeconomic factors

• High sensitivity of profits to • High Savings Rate and

interest rate fluctuations. stability

• Further deregulation and • Immune to volatility in

competition on the cards S global market
T
• Low per capita • Efficiency and Products
penetration
O do not match global

• Opened up foreign
W standards

markets • Strength more reflective

of economies of scale
• Insurance, Mutual Fund
and DP services • Low per capita GDP

• Prevalence of paper-
based payment systems
Challenges Faced by Indian Banking Sectors
Deregulation and Changing customer behavior
Indian Banking Sector
Consolidation is the way ahead

 Make up of an Indian Banking behemoth

– Financial Inclusion of Rural India, Increase in NW and EV, Reduce
Competition, increased market power, reduced earnings volatility

 Expansion of the bank’s network

 Fits in the scheme of things of RBI

– Increased access to Capital Markets, better implementation and
execution of monetary policy changes, improving quality and
efficiency in performance, improvement in service delivery
channels, global trend, economies of scale, economies of scope

 Expansion is the need of the hour

– Cost effectiveness, increase in market share, increase in
stakeholder’s value, cross selling of products, utilization of
complementary assets, sustaining competitive pressure,
operational efficiency and profitability
Contents

 SWOT Analysis and Challenges

1. Banking Industry Analysis
 Why Consolidation

 Geographical and other Synergies

2. Basis of Selecting Banks
 Strength of merged entity

 Bank of Baroda and Syndicate Bank

3. Key Projections
 Consolidated

 Assumptions
ns4. Valuation
 Calculations

5. Strength of merged Entity  Key Ratios

6. Potential Vulnerabilities  Issues faced by merged entity

Basis of Selecting Banks -
Bank of Baroda and Syndicate Bank

 Bank of Baroda – 3rd largest PSU bank in India

 Syndicate bank - 8th largest PSU bank in India

Geographical Synergies:

Places where bank would want Places where banks are

to reach after merger already present
Improving Geographical Penetration
Strong Pan India Presence

Rest Of India; 450 AP; 312

TN; 183

Delhi; 152 Kerala; 102

Karnataka; 617
Maharashtra; 156
UP; 210
Synergies contd..
Merged Entity would become 2nd largest PSB
 Value migration from BOB to Syndicate Bank
– ` 83.96 EPS(BoB’ 2010) > `15.58 EPS(Syndicate Bank’2010)

 Better penetration into the SME and Microfinance sector lending – Sarthee, SME
Charter, Gift of Vision

 Enhancing Investment banking activity and product mix – Baroda Pioneer,

Baroda Health, IndiaFirst Life Insurance

 Cultural Diversity to be used as strength

 Total Balance Sheet size of Consolidated entity would increase, thus helping
them to become 2nd largest public sector bank

Bank Year Balance Sheet Size

PNB 2010 ` 435930 crs.
Bank Of Baroda 2010 ` 416079 crs.
Merged Entity 2011 ` 748817 crs
PNB 2011 ` 516412 crs. Source:Annual Reports
FY10
Integration reducing the costs

 Bank of Baroda and Syndicate Bank - Information

Technology,
– BoB has a base of 270 branches which offer depository
participant services
– Syndicate bank - currently limited to 10 branches (poised to
gain from the much advanced technology platform of Bank of
Baroda)

 Bank of Baroda and Syndicate bank - Data Centres

A Central DB –> result in cost savings

 Bank of Baroda and Syndicate bank - Capacity

– Needs to be increased but cost will be much lower than
maintaining two data centres in Mumbai.
“NavNirman” and Baroda Next
Syndicate would be a part of new strategies

Harness power of Technology

Alignment of Processes
Enterprise wide Sales Orientation Syndicate1
Process Simplification

NavNirman – Business Process Syndicate2

Reengineering and Organizational
Restructuring
Syndicate3

BoB 1 BoB 2 BoB 3 BoB 4

Other Advantages
Bigger Entity – Better returns

 Mode of Functioning of Banks – BoB (Aggressive)

 Reinforcement of Brand Image of Bank of Baroda

Better Market image and Brand Value

Better Valuation and better shareholder returns

 Better bargaining power of the entity

– Greater geographical penetration, enhanced market image and
other synergic factors
Contents

 SWOT Analysis and Challenges

1. Banking Industry Analysis
 Why Consolidation

 Geographical and other Synergies

2. Basis of Selecting Banks
 Strength of merged entity

 Bank of Baroda and Syndicate Bank

3. Key Projections
 Consolidated

 Assumptions
ns4. Valuation
 Calculations

5. Strength of merged Entity  Key Ratios

6. Potential Vulnerabilities  Issues faced by merged entity

Projected – BS and PL Key Assumptions
If Growth Rates are NA then the values are projected based on Forecast function in
excel
Advances Credit growth to be 23% (BoB) & 16%(SB)
YOY Deposit Growth Rate 22% (BoB) 15% (Syndicate bank)
Repo Rate and Reverse Repo 4.75% and 5.5%
Other Liabilities taking forecast from 2 years

Average cash with RBI/ Deposit ratio 5.5% (BoB) and 7%(SB)(Assuming it to be
constant)
Average Balance with other banks / 8.3% (BoB) and 4%(SB) (Assuming it to be
Deposits constant)
As banks does not depend much on fixed
Fixed Assets assets so assuming it to be constant.
7.5%-7.9% in 3 years (BoB) and 8.0% -
Interest Rates on Advances
8.4%(SB)
Interest Rates on Deposits 4.5% (BoB) and 5.7% (SB)
Net NPA / Total Assets 0.2% (BoB) and 0.6% (SB)
Projected BoB BS & PL – key elements
Return on net worth increasing to 28%.

In ` crs. Mar ’10 Mar ’11 Mar ’12 Mar ‘13

Deposits 2,41,044.26 2,94,074.00 3,58,770.28 4,37,699.74

Advances 1,75,035.29 2,15,293.41 2,64,810.89 3,25,717.39

Investments 6,11,82.37 69,933.50 78,662.70 87,391.90

Reported Net 3,058.33 4,220.16 6,788.45 8,181.33

Profit

Return on NW 20.24% 23.23% 30.32% 28.04%

NIM 2.18% 2.34% 2.84% 2.75%

Bank Of Baroda - Key Financial Information
Maintaining a healthy CRAR
BOB Mar ’10 Mar ’11 Mar ’12 Mar ‘13

Cost Of Equity 16.10% 16.10% 16.10% 16.10%

Deposit as % of
86.6 88.2 89.5 90.9
Liabilities

Credit Deposit
0.726 0.732 0.738 0.744
ratio

Tier 1 Capital
15,838.95 19,148.59 23,718.49 30,974.87
(Rs. Cr)
Tier 2 Capital
7,274.64 7,242.49 7,210.89 7,179.29
(Rs. Cr)

RWA 2,08,737.53 2,49,852.35 3,00,340.75 3,60,870.13

CRAR % 11.07 10.56 10.29 10.57

Projected Syndicate Bank BS & PL – key elements
Net profit almost doubles in 3 years.
In ` crs. Mar ’10 Mar ’11 Mar ’12 Mar ‘13

Deposits 1,17,025.79 1,34,579.66 1,54,766.61 1,77,981.60

Borrowings 12,172.69 13,181.58 13,284.82 13186.57

Advances 90,406.36 1,04,871.38 1,21,650.80 1,41,114.93

Investments 33,010.93 35,662.54 38,241.75 40,820.95

Reported Net
813.32 1,084.80 1,276.04 1,506.72
Profit

RoNW 15.57% 18.16% 18.3% 18.49%

NIM 2.01% 2.02% 1.97% 1.94%

Syndicate Bank- Key Financial Information
Syndicate Mar ’10 Mar ’11 Mar ’12 Mar ‘13

Cost Of Equity 15.65% 15.65% 15.65% 15.65%

Deposit as % of
84.1 84.7 85.8 86.8
Liabilities

Credit Deposit
0.772 0.779 0.786 0.792
ratio
Tier 1 Capital
5,406.06 6,185.51 7,225.61 8,449.29
(Rs. Cr)
Tier 2 Capital
4,612.81 4,954.95 5,318.61 5,697.42
(Rs. Cr)

RWA (Rs. Cr) 1,04,288.21 1,19,029.60 1,35,270.15 1,53,774.06

CRAR % 9.60% 9.35% 9.27% 9.20%

Projected BS and PL – Merger Entity
Key Assumptions
Sum of both the entries is taken where assumptions are not given
Advances Syndicate Bank rate would increase by one
percentage point from 2nd year.
Fee Income It would increase by 10 percentage points in
second and third year of merger
Operating Expense Because of economies of scale operating
expense would decrease by around 10% from
2nd year of merger

Provision for doubtful loans and contingencies Decrease by 10% from 2nd year of merger
Other Liabilities Taking forecast from 2 years
Interest Rates on Advances Interest rate of 8 % average of both the banks
on advances
Fixed Assets Because of clubbing of some branches fixed
assets of syndicate bank would reduce by 10%
points.

Net NPA 0.3% of Total Assets

 Projected Consolidated BS & PL
Key elements
In ` crs. 2011 2012 2013

Deposits 4,28,653.66 5,13,536.89 6,15,681.34

Borrowings 26,355.80 21,052.27 22,038.931

Advances 3,20,164.78 3,87,510.40 4,70,502.82

Investments 1,05,596.04 1,16,904.45 1,28,212.86

Reported Net Profit 5,691.44 8,663.98 10,200.43

RoA 1.16% 1.49% 1.48%

NIM 2.35% 2.61% 2.48%

CRAR 9.012% 9.185% 9.812%

RONW 23.58% 30.32% 28.30%

Contents

 SWOT Analysis and Challenges

1. Banking Industry Analysis
 Why Consolidation

 Geographical and other Synergies

2. Basis of Selecting Banks
 Strength of merged entity

 Bank of Baroda and Syndicate Bank

3. Key Projections
 Consolidated

 Assumptions
ns4. Valuation
 Calculations

5. Strength of merged Entity  Key Ratios

6. Potential Vulnerabilities  Issues faced by merged entity

Valuation - Assumptions

 Basic CAPM model is used to calculate Cost of Equity

 Beta – is assumed to be same as that for FY2010 for Bank of

Baroda and Syndicate bank and for the merged entity it is same
as Bank of Baroda

 Risk free rate – is assumed to be 8%

 The market Risk premium is considered as 17%

 Net profit is used as a proxy for cash flow.

 Dividend discount model is used to calculate net present value

 Synergies are calculated based on thee year projections

Synergy Calculation
In ` crs. 2011 2012 2013

Net Profit 4,220.16 6,788.45 8,181.33

BOB Cost of Equity 16.10% 16.10% 16.10%

NPV 13,899.07

Net Profit 1,084.80 1,276.04 1,506.72

Syndicate Cost of Equity 15.65% 15.65% 15.65%

NPV 2,866.13

Net Profit 5,691.44 8,663.98 10,200.43

Merged Cost of Equity 16.10% 16.10% 16.10%

NPV 17,847.96

Synergy: NPV Consolidated - (NPV BoB + NPV Syndicate bank) = 1082.76 CRORES
Valuation
Bank Of Baroda Syndicate Bank
Outstanding Shares 36.25 Crs 49.39 Crs
52 weeks Trailing Average ` 652.00 `103.50
Market Capitalization `23632.69 crs `5111.79 crs

Swap Ratio 6.3 (1 BOB = 6.3 Syndicate)

21.93 rs. (Synergy/no. Of

Premium per share of Syndicate Bank shares)
Total Price that can be paid per share (Actual price + 125.423
premium)
Swap Ratio considering premium 5.198

Range of Swap Ratio 5.198 - 6.3

Market Capitalization of Merged Entity 29827.240

Number of Shares after merger 45.747 crores

Price per share of merged entity 652.000

Why Stock Payment

 Government has a majority stake in both the

banks

 Most banking mergers in the past have been

stock deals

 The target bank has a stake in the growth of the

parent company

 Equity route do not significantly impact cash

reserves
Contents

 SWOT Analysis and Challenges

1. Banking Industry Analysis
 Why Consolidation

 Geographical and other Synergies

2. Basis of Selecting Banks
 Strength of merged entity

 Bank of Baroda and Syndicate Bank

3. Key Projections
 Consolidated

ns  Assumptions
4. Valuation
 Calculations

5. Strength of merged Entity  Key Ratios

6. Potential Vulnerabilities  Issues faced by merged entity

Synergies – Key Ratios and Information
Merged entity provides improved results
Key Parameters (2011) BOB Syndicate Consolidated

Business per employee 13.07 cr 8.80 cr 11.31 cr

Profit per employee 0.10 cr 0.039 cr 0.086 cr

Interest income/working
6.86% 7.72% 6.90%
funds
Non-Interest
1.15% 0.90% 1.03%
income/working funds
Net NPAs 666.27 cr 977.73 cr 1475.32 cr

Net NPAs/ Net advances 0.34% 1.07% 0.50%

Employees 38,960 27,200 66,160

Number of branches 3305 2270 5348

Business per branch 154.12 cr 105.48 cr 140.01 cr

Net profit per branch 1.27 cr 0.47 cr 1.06 cr

Net profit 4220.46 cr 1084.8 cr 5691.44 cr

Business 5,09,367 cr 2,39,451.04 cr 7,48,818.44 cr

Credit-Deposit Ratio 73.22 % 77.9 % 74.69 %

 Risk Spread – Sensitivity Analysis
Key Risk ratios BOB Syndicate Merged(55%) Merged(60%) Merged(65%)

2010 180012.383 78888.740 ----------- ----------- -----------

RWA 2011 236526.892 87288.372 270474.850 295063.47 319652.096

2012 284322.578 99198.116 319986.212 349075.87 378165.523
2013 341623.719 112767.64 379385.931 413875.56 448365.192
2010 14.36 12.7 ------------ ------------ ------------

CRAR 2011 11.15 12.76 9.832 9.013 8.319

(%) 2012 10.87 12.64 10.021 9.186 8.479
2013 11.16 12.54 10.704 9.812 9.057

Assumptions

Bank of Baroda – RWA for 2011 onwards is assumed to be 71% based on last 2 years average

Syndicate Bank – RWA for 2011 onwards is assumed to be 55% based on last 2 years average
Contents

 SWOT Analysis and Challenges

1. Banking Industry Analysis
 Why Consolidation

 Geographical and other Synergies

2. Basis of Selecting Banks
 Strength of merged entity

 Bank of Baroda and Syndicate Bank

3. Key Projections
 Consolidated

ns  Assumptions
4. Valuation
 Calculations

5. Strength of merged Entity  Key Ratios

6. Potential Vulnerabilities  Potential Issues for merged entity

Merged Entity – Potential Vulnerabilities

 Employee unions are averse to mergers due to

cost rationalization

 Cross cultural issues

 Degree and scope of integration to the extent

forecasted

 Merger likely to impact EPS in the early years

References

 India Commercial Banking Report Q2 2010 : © Business Monitor

International Ltd
 www.rbidocs.rbi.org.in
 http://www.bankofbaroda.com/
 http://www.syndicatebank.in/
 http://www.capitaline.com/new/index.asp
 Impact of Mergers on the Cost Efficiency of Indian Commercial Banks -
Eurasian Journal of Business and Economics 2010 , Pardeep KAUR
 Is Consolidation way to make India’s best banks better - The Financial
Express 2010
 http://www.utiicm.com/Cmc/PDFs/2002/bpv%5E59.pdf : EVA by Indian
Banks
 ICICI Direct Estimate of Bank Of Baroda
 Syndicate Bank Research report - Bajaj Capital Centre for Investment
Research
 Commercial Banking at a Glance – RBI
 www.moneycontrol.com
Thank You…

Contact:
Team E