Mulyankan Team E

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Consolidation in Indian Banking

Industry - The M&A way

Team E

Mulyankan 2010


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1. Banking Industry Analysis SWOT Analysis and Challenges

Why Consolidation

2. Basis ofSelecting Banks

3. Key Projections

4. Valuation

5.Strength of merged Entity

6. Potential Vulnerabilities

Geographical and other Synergies

Strength of merged entity

Bank of Baroda and Syndicate Bank

Consolidated

Assumptions

Calculations

Key Ratios

Issues faced by merged entity

Contents


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Low per capitapenetration

Opened up foreignmarkets

Insurance, Mutual Fundand DP services

SWOT of Indian banking Sector

Efficiency and Productsdo not match global

standards

Strength more reflectiveof economies of scale

Low per capita GDP

Prevalence of paper-

based payment systems

FavorableMacroeconomic factors

High Savings Rate andstability

Immune to volatility inglobal market

Low development ofstructured products.

High sensitivity ofprofits to interest ratefluctuations.

Further deregulationand competition on thecards

T

T S

S

W

WO

O


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Challenges Faced by Indian Banking SectorsDeregulation and Changing customer behavior


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Indian Banking SectorConsolidation is the way ahead

Make up of an Indian Banking behemoth

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

Expansion of the banks network

Fits in the scheme of things of RBI

Increased access to Capital Markets, better implementation andexecution of monetary policy changes, improving quality andefficiency in performance, improvement in service deliverychannels, global trend, economies of scale, economies of scope

Expansion is the need of the hour

Cost effectiveness, increase in market share, increase instakeholders value, cross selling of products, utilization of complementary assets, sustaining competitivepressure, operational efficiency and profitability


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Why Consolidation


3. Key Projections

4. Valuation






Consolidated

Assumptions

Calculations

Key Ratios


Contents


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Basis ofSelecting Banks -Bank of Baroda and Syndicate Bank

Geographical Synergies:

Bank of Baroda 3rd largest PSU bank in India Syndicate bank - 8th largest PSU bank in India

Places where bank wouldwant to reach after merger

Places where banks arealready present

P6


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Slide 7

P6 added Syndicate here

Changed the figure

Pallav, 10/2/2010


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Improving Geographical PenetrationStrong Pan India Presence

AP, 312

TN, 183Kerala, 102

Karnataka, 617UP, 210

Maharashtra, 156

Delhi, 152

Rest Of India, 450


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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 Bank2010)

Better penetration into the SME and Microfinance sector lending Sarthee, SME Charter, Gift ofVision

Enhancing Investment banking activity and product mix BarodaPioneer, Baroda Health, IndiaFirst Life Insurance

Cultural Diversity to be used as strength

Total Balance Sheet size of Consolidated entity wouldincrease, thus helping them to become 2nd largest public sector

bankBank 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 ReportsFY10


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Integration reducing the costs

Bank of Baroda and Syndicate Bank - InformationTechnology,

BoB has a base of 270 branches which offer depositoryparticipant services

Syndicate bank - currently limited to 10 branches (poised to

gain from the much advanced technology platform of Bank ofBaroda)

Bank of Baroda and Syndicate bank - Data Centres

Bank of Baroda and Syndicate bank - Capacity

Needs to be increased but cost will be much lower thanmaintaining two data centres in Mumbai.

A Central DB > result in cost savings

P10


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Slide 10

P10 1. Point 1 should show that BOB has a incentive, and not synidcate has a incentive

2. 2&3 points not clear enoughPallav, 10/2/2010


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NavNirman and Baroda NextSyndicate would be a part of new strategies

BoB 1 BoB 2 BoB 3 BoB 4

Syndicate1

NavNirman Business Process

Reengineering and Organizational

Restructuring

Harness power of Technology

Alignment ofProcesses

Enterprise wide Sales Orientation

Process Simplification

Syndicate2

Syndicate3

P12


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Slide 11

P12 not much given about navnirmaan process on net,

useless to dedicate a full slide herePallav, 10/2/2010


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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 andother synergic factors


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Why Consolidation


3. Key Projections

4. Valuation






Consolidated

Assumptions

Calculations

Key Ratios


Contents


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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 ratio5.5% (BoB) and 7%(SB)(Assuming it to be

constant)

Average Balance with other banks /

Deposits

8.3% (BoB) and 4%(SB) (Assuming it to be

constant)

Fixed AssetsAs banks does not depend much on fixedassets so assuming it to be constant.

Interest Rates on Advances7.5%-7.9% in 3 years (BoB) and 8.0% -

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)


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Projected BoB BS & PL key elementsReturn 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 NetProfit 3

,058.33 4,220.16 6,788.45 8,181.33

Return on NW 20.24% 23.23% 30.32% 28.04%

NIM 2.18% 2.34% 2.84% 2.75%


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Bank Of Baroda - Key Financial InformationMaintaining 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

Liabilities

86.6 88.2 89.5 90.9

Credit Deposit

ratio0.726 0.732 0.738 0.744

Tier 1 Capital

(Rs. Cr)15,838.95 19,148.59 23,718.49 30,974.87

Tier 2 Capital

(Rs. Cr)7,274.64 7,242.49 7,210.89 7,179.29

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


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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 NetProfit

813.32 1,084.80 1,276.04 1,506.72

RoNW 15.57% 18.16% 18.3% 18.49%

NIM 2.01% 2.02% 1.97% 1.94%


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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

Liabilities84.1 84.7 85.8 86.8

Credit Deposit

ratio0.772 0.779 0.786 0.792

Tier 1 Capital

(Rs. Cr)5,406.06 6,185.51 7,225.61 8,449.29

Tier 2 Capital(Rs. Cr)

4,612.81 4,954.95 5,318.61 5,697.42

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%


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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 operatingexpense 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


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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%


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Why Consolidation


3. Key Projections

4. Valuation






Consolidated

Assumptions

Calculations

Key Ratios


Contents


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Valuation - Assumptions

Basic CAPM model is used to calculate Cost ofEquity

Beta is assumed to be same as that for FY2010 for Bank ofBaroda and Syndicate bank and for the merged entity it is sameas 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


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Synergy Calculation

In ` crs. 2011 2012 2013

BOB

Net Profit 4,220.16 6,788.45 8,181.33

Cost of Equity 16.10% 16.10% 16.10%

NPV 13,899.07

Syndicate

Net Profit 1,084.80 1,276.04 1,506.72

Cost of Equity 15.65% 15.65% 15.65%

NPV 2,866.13

Merged

Net Profit 5,691.44 8,663.98 10,200.43

Cost of Equity 16.10% 16.10% 16.10%

NPV 17,847.96

Synergy: NPV Consolidated - (NPV BoB + NPV Syndicate bank) = 1082.76 CRORES


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Valuation

BankO

f BarodaS

yndicate BankOutstanding Shares 36.25 Crs 49.39 Crs

52 weeks Trailing Average ` 652.00 `103.50

Market Capitalization `23632.69 crs `5111.79 crs

S

wap Ratio6.3 (1 BOB = 6.3 Syndicate)

Premium per share ofSyndicate Bank21.93 rs. (Synergy/no. Of

shares)

Total Price that can be paid per share (Actual price +

premium)125.423

Swap Ratio considering premium 5.198

Range ofSwap Ratio 5.198 - 6.3

Market Capitalization ofMerged Entity 29827.240

Number ofShares after merger 45.747 crores

Price per share of merged entity 652.000


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Why Stock Payment

Government has a majority stake in both thebanks

Most banking mergers in the past have beenstock deals

The target bank has a stake in the growth of theparent company

Equity route do not significantly impact cashreserves


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Why Consolidation


3. Key Projections

4. Valuation






Consolidated

Assumptions

Calculations

Key Ratios


Contents


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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

funds6.86% 7.72% 6.90%

Non-Interest

income/working funds 1.15% 0.90% 1.03%

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 %


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Risk Spread Sensitivity Analysis

Key Risk ratios BOB Syndicate Merged(55%) Merged(60%) Merged(65%)

RWA

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

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

CRAR

(%)

2010 14.36 12.7 ------------ ------------ ------------

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 R

WA for 2011 onwards is assumed to be 55% based on last 2 years average


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Why Consolidation


3. Key Projections

4. Valuation






Consolidated

Assumptions

Calculations

Key Ratios

Potential Issues for merged entity

Contents


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Merged Entity Potential Vulnerabilities

Employee unions are averse to mergers due tocost rationalization

Cross cultural issues

Degree and scope of integration to the extentforecasted

Merger likely to impact EPS in the early years


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References

India Commercial Banking Report Q2 2010 : Business MonitorInternational 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 Indias best banks better - The FinancialExpress 2010

http://www.utiicm.com/Cmc/PDFs/2002/bpv%5E59.pdf: EVA by IndianBanks

ICICI Direct Estimate of Bank Of Baroda

Syndicate Bank Research report - Bajaj Capital Centre for InvestmentResearch

Commercial Banking at a Glance RBI

www.moneycontrol.com


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Thank You

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