Industry structure: M&A in Indian Banking

Ashvin Parekh, Partner & National leader Global Financial Services

3 December 2010

Industry Structure: M&A in Indian BankingPage *

Regulatory FrameworkBanking companies (Acquisition & Transfer of Undertakings) act 1970Section 9 empowers the govt. to make the scheme to carry out the following:Capital structure of corresponding new bankConstitute the board of directorsReconstitution of a new bank into two or more corporations or amalgamation of any new bank with any other new bank

Companies Act 1956Approval of the board of directors of individual companies for the draft proposalApplication in High CourtApproval of shareholders by 75% majoritySanction by the High CourtFiling of the court order with the Registrar of Companies

RBI Guidelines for merger/ amalgamation of private sector banksDecision of merger has to be approved by 2/3rd of the total Board of the respective companies. Applicable to PSU banks also.Amalgamation between two banking companiesApproval by shareholders with 2/3 majorityAfter approval the scheme should be submitted to RBI

Industry Structure: M&A in Indian BankingPage *

Acquisitions over the last decadeNeed to let M&As be business driven within broad regulatory framework

Date of mergerAcquirer bankTarget bankAssets of target bank as % of acquiring banks assets Number of branches of target bankAugust 2010ICICI BankBank of Rajasthan0.05463February 2008HDFC BankCenturion Bank of Punjab 20394August 2007Centurion Bank of PunjabLord Krishna Bank11110April 2007ICICI BankSangli Bank 0.5 190March 2007Indian Overseas BankBharat Overseas Bank6 102October 2006IDBIUnited Western Bank8 230September 2006Federal BankGanesh Bank of Kurundwad 1 32October 2005Centurion BankBank of Punjab106136August 2004Oriental Bank of CommerceGlobal Trust Bank17104February 2003Punjab National BankNedungadi Bank2 173March 2001ICICI BankBank of Madura36350February 2000HDFC BankTimes Bank7539

Industry Structure: M&A in Indian BankingPage *

Global comparison (1/2)Source: The Banker Top 1000 World Banks 2010

RankBankTotal Assets ($bn)1BNP Paribas2,9652Royal Bank of Scotland Group2.7503Crdit Agricole2,4414HSBC Holdings2,3645Barclays2,2356Bank of America Corp2,2237Deutsche Bank2,1628JP Morgan Chase2,0329Mitsubishi UFJ Financial Group2,02610Citigroup1,85768State Bank of India279111ICICI Bank103

Top 200No. of BanksUSA27Japan18Germany15China13Spain13India3

Top 1000No. of BanksUSA183Japan102China84Germany72Spain41Switzerland37India31

Industry Structure: M&A in Indian BankingPage *

Global comparison (1/2)Source: FDIC (USA), Bank of England, Financial Service Authority, RBI*As on 31 October 2010; **As on 30 September 2010# All scheduled banks (77 SCB, 86 RRBs, 69 Co-operative)## Only SCB branchesIndian banks lack size with only 1 featuring in the top 100 and 3 in top 200 globallyTwo different approachesUSA large number of banks for large coverageUK smaller number of banks (153 incorporated in UK, 328 deposit taking)Population/ branch very high

USA*UK*IndiaCommercial Banks6,622350232#Savings institutions1,138--Branches98,91315,00069,160##Total loans ($ bn)7,3895,953765**Total assets ($ bn)13,3834,1371,135Total deposits ($ bn)7,7383,8701,053**Population/ branch3,1364,15616,962

Industry Structure: M&A in Indian BankingPage *

Projected growth over next 5 yearsSource: Ernst & Young Research estimatesEstimated Capital Requirement in 2015Strong projected economic growthBanks advances to grow at a CAGR of 20%, to become 2.4 times the current size by 2015Estimates do not factor in requirements on account of financial inclusion thrustNeed for Mega Banks to bring in capital and scale

Rs.(000 crs)USD bnPSU banks300-35065-76Private banks125-15027-32Foreign banks42-469-10Total467-546101-118

Industry Structure: M&A in Indian BankingPage *

Industry structureIndustry structure will help alignment of customer segments and servicesM&As essential for creation of Mega banksM&As among mid and smaller sized banks will drive efficiency and growthMega banks will be able to support industry in global expansionRegulatory framework should allow for inorganic growth especially among private and foreign banks

Industry Structure: M&A in Indian BankingPage *

M&As in banking lacking regulatory and legal frameworkPublic sectorNatural regulatory path not availableWho will initiate the process? Banks themselves or the govt.Labour/ human resource concern; unions opposed to the move

Private sectorRegulator driven

Foreign banksRegulatory restrictionsReforms needed in M&A regulatory structure

Thank you

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