Merger and Acquition - IDBI and IDBI Bank

IDBI: The way forward?

Challenging one of the most aggressive banks in the country i.e. ICICI Bank in the retail space and gaining market share is no mean task! But IDBI Bank, post its merger with parent company IDBI, seems to be gearing up to achieve this feat.

A scrutiny of the fundamentals of the two merging entities (read IDBI and IDBI Bank), suggests that both the entities will be equal beneficiaries of the synergy. The “merger ratio”, which will reflect their respective bargaining powers, will also give an indication of the future valuations to be assigned to the merged entity. The following is an estimation of the said valuations in two different scenarios.

IDBI Bank merges with IDBI...
In this case the synergies will act in favour of shareholders of IDBI, as their upside in terms of EPS will be higher than the IDBI Bank shareholders.

Reverse merger of IDBI with IDBI Bank...
In this case the IDBI Bank shareholders will be the undisputed beneficiaries of the merger, as every share of IDBI (current market price Rs 97) will then be valued at Rs 25 or lesser (i.e. 74% cheaper than the market price!).

Let us look at Reverse Merger of ICICI with ICICI Bank:

Post its reverse merger in FY02, ICICI Bank has emerged as the strongest entity in Indian private sector banking. The investments and advances of the bank have augmented by 19% and 32% respectively over the last 3 years, while the deposits have grown by a whopping 112%. This gives a clear indication of the momentum that the bank gained, post its merger. Are we looking at a similar story in case of IDBI? Our estimations of the financials of the merged entity present the following picture….

	ICICI Bank	ICICI Bank	IDBI	IDBI Bank	Consolidated Entity
	(Pre merger- FY01)	FY 04	FY 04	FY 04	FY 04
ROA	0.40%	1.40%	0.60%	1.30%	0.95%
Investments (Rs in m)	358,911	427,429	98,800	39,100	137,900
Advances (Rs in m)	470,349	620,955	451,100	74,000	525,100
Deposits (Rs in m)	320,851	681,086	49,800	100,500	150,300
Net NPAs (Rs m)	26,292	14,226	11,244	623	11,867
Net NPA to advances	5.50%	2.20%	2%	0.80%	2.26%
Credit / Deposit Ratio	146.60%	91.20%	85%	73.60%	349%
No. of Branches	540	413	101	92	193
ATMs	1,000	1675	NA	298	298
No. of Employees	7,700	13,609	1,400	1,700	3,100
Business/employee (Rs m)	103	95.7	-	108.0	108
Business / branch (Rs m)	1,465	3,152	-	1,517	1,517
Profits/employee (Rs m)	4.8	39.6	2.7	0.8	3.5
Profit after Tax (Rs m)	4,249	3,788	3,789	1,326	5,115
No. of shares outstanding (m)	613.0	616.0	652.8	214.2
No of shares held by IDBI in IDBI Bank (m)			120.0
No. of shares outdg post merger (m)					684.2
EPS (Rs)	4.2	26.6	5.8	6.3	7.48

The above comparison is intended to give investors, a futuristic view of the strength of the merged entity, as well as the figures that the entity should benchmark against, to achieve its goal of replicating ICICI Bank’s success. As the figures suggest, we are likely to witness a head to head collision between ICICI Bank and IDBI Bank in terms of corporate financing. But when it comes to retail, it is evident that, IDBI has a long way to go. Nevertheless, IDBI scores immensely in terms of its efficiency ratios. In spite of having one third the number of employees and half the number of branches, the merged entity (IDBI) is likely to outperform its prospective retailing rival (see the business per employee and business per branch ratios of ICICI Bank and merged IDBI).

However, the caveat in this case is the true quality of the assets. Although IDBI has been successful in pruning its Net NPA ratio to 2.4% in FY04 as against 14.2% in FY03, thanks to the Rs 90 bn government bailout package, 37% of the “restructured loans” still have a high probability of slippage in future.

Watermark for Fundamental Analyst:

At the current price of Rs 364, ICICI Bank is trading at a price to book value ratio of 2.7, while at Rs 97 and Rs 51, IDBI and IDBI Bank are trading at price to book value ratios of 0.7 and 2.0 respectively. When and what will be the true valuations accorded to the proposed merged entity, depends upon how soon the respective entities (IDBI and IDBI Bank) are successful in displaying the true colours of their synergy.