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ICICI Bank - BOR merger: Our view - Views on News from Equitymaster
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ICICI Bank - BOR merger: Our view
May 20, 2010

A month back we met the management of ICICI Bank. The core focus of the bank then was to streamline its assets with its risk appetite. The management was also very keen to improve the bank's CASA (low cost deposits) proportion along with the net interest margin (NIM). The high capital adequacy was seen as a war-chest to deal with times of liquidity crunch or changes in the RBI's provisioning mandate.

A couple of weeks later, the news of the proposed merger of the bank with beleaguered Bank of Rajasthan (BOR) did not come as a surprise to us. Reason being most large private sector banks in the country have been looking at opportunities for consolidation. It particularly bodes well in this case when acquiring a bank with 4% of its balance sheet size can help ICICI grow its franchise by 27%. Also the fact that BORís CASA ratio and asset quality (we see more surprises here) is pretty much in line with that of ICICI Bank supports the logic of the merger. But what worries us are BORís tainted past and the willingness on ICICIís part to overpay for acquiring it.

For the uninitiated, BOR had lately been in trouble with the RBI for lapses in corporate governance. The SEBI also pulled up the promoters (Tayal family) for alleged fraudulent stock dealings and inconsistencies in its shareholding records. The bank, which had 306 branches in 1999, managed to add only 157 branches since then as the RBI did not give approvals for new branches in the recent past.

The RBI has also been objecting to the high ownership of Tayals (28.6% in December 2009) for several years now. Under the RBI guidelines, promoter stake in a bank should be a maximum of 10%. Further, in FY09 the RBI had slapped Rs 2.5 m fine on the bank for alleged violation of various norms.

While these past instances will no longer matter once BOR gets merged with ICICI bank, what will are the impact of the merger on the latterís financials. Given that its balance sheet size is a fraction of ICICIís any further slippage in BORís asset quality is unlikely to have an impact on the formerís numbers. Improvement in CASA and NIM will automatically come in with the merger. BOR had a net loss of Rs 100 m in its books at the end of 9mFY10 that needs to be written off.

Branches* (nos) ††††††††††† 2,000 ††††††††††† 463
Employees (nos) ††††††††† 34,596 †††††††† 4,075
Advances (Rs bn) ††††††††††† 2,183 †††††††††††††† 77
CASA (%) 28 27
NIMs (%) 2.4 2.2
Net NPAs (%) 2.1 0.7
CAR (%) 13.9 11.5
Book value* (Rs) 463 40
*9mFY10     Data source: Equitymaster, RBI

The merger will be at a share swap ratio of 25 shares of ICICI Bank for 118 shares of BOR. ICICI Bank has cited that this ratio has been arrived at an average market capitalisation per branch of old private sector banks. Also relevant precedent transactions have been considered. However, this pegs BORís valuation at nearly 4.5 times its FY10 book value. This we believe is grossly expensive despite the bankís franchise strength.

While ICICI Bankís long term prospects will be supported by the additional franchise and CASA base offered by BOR, in the medium term the merger does seem detrimental to the interests of ICICI Bankís shareholders. We retain our negative view on the stock of ICICI Bank.

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