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UTI Global Bank: The right thing? - Views on News from Equitymaster
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  • Jan 25, 2001

    UTI Global Bank: The right thing?

    UTI Bank has announced a merger with Global Trust Bank in an all share deal. The boards of both the banks have approved the merger and will decide the share exchange ratio on 27th January 2001. The merged entity will be known as UTI Global Bank and will combine the strengths and complementary features of the two banks.

    Both the banks have a combined network of branches and ATMs of 157 and 281 respectively. These are spread out across the county. The merger would further enhance their geographical reach apart from increasing the balance sheet size. The merged entity will have an asset base of over Rs 145 bn and a deposit base of over Rs 160 bn.

    Particulars UTI Bank Global Trust Bank
    Number of branches 79 78
    ATMs 225 56
    Employees 739 939
    Revenues/employee (Rs m) 11.1 8.8
    Profits/employee (Rs m) 1.0 1.5
    Profit margin per employee 9.4% 16.5%

    Private sector banks, which have been on a high-speed growth trajectory over the last several years, are keen to develop a nationwide presence. The merger is therefore a step towards taking care of this drawback that private banks face vis a vis the public sector banks. Building a network is time consuming, so therefore, the quickest way is to scheme up a merger/association. Second, size has become very important in the present environment where customers want their banks to serve up most financial products (universal banking). In such a scenario having a large balance sheet is very important. Here too, rather than raising more capital, a merger/amalgamation is a preferable route.

    Financial Snapshot
    (Rs m) UTI Bank Global Trust Bank
    Total assets 66,690 75,312
    Deposits 82,320 74,331
    Total revenues 8,206 8,289
    Profit after taxes 774 1,370
    OPM 11.4% 22.0%
    NPM 9.4% 16.5%
    Number of shares (m) 131.9 121.4
    FDEPS (Rs) 5.9 11.3
    DPS (Rs) 1.2 2.2
    Book value/share (Rs) 18.2 52.0

    In terms of financials GTB is better than UTI Bank with a relatively lower NPA ratio, higher productivity per employee and better capital adequacy. Also, it earns higher margins with comparatively low cost deposits. However, its excessive reliance on a volatile stream of revenues is a concern as it derives around 38% of its income from investments (33% in case of UTI Bank).

    The success of the merged entity however, depends on their ability to bring down the cost of their deposits as saving account deposits contributes a marginal 5% to total deposits. As a result profit margins of both the banks are lower than the other private sector and public sector banks.

    Key Ratios
    Particulars UTI Bank Global Trust Bank
    CAR 11.4% 14.1%
    NPAs as a % of net advances 4.7% 1.4%
    ROA 2.2% 3.0%
    Interest spread as a % of total assets 2.5% 4.7%

    The current market capitalization of Global Trust Bank is 1.8 times higher than the market cap of UTI Bank. Several factors apart from market cap are likely to influence the merger ratio, which include level of NPAs, profit margins and book value per share.

    Comparative Valuations
    Particulars UTI Bank Global Trust Bank
    Market Price (Rs) 50 95
    PER (x) 8.5 8.4
    Dividend yield 2.4% 2.3%
    Price/Book value (x) 2.8 1.8

    The merger follows the consolidation in the banking sector, which has been triggered by the new private sector banks. Earlier, HDFC Bank and Times Bank merged, followed by the deal between ICICI Bank and Bank of Madura. It is likely that in coming months, more such deals will hit the headlines.



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