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Centurion Bank: A new face - Views on News from Equitymaster
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Centurion Bank: A new face
Jul 6, 2005

The merger of Centurion Bank with Bank of Punjab seems to have finally kick started the long awaited consolidation phase in the Indian banking sector. The merger accentuates the need for smaller banks to acquire scale and reach so as to adequately capitalise on the incremental credit growth. This is especially given since the competition from larger banks and foreign counterparts has started threatening the survival of the smaller entities. The said merger is an apt example of the future direction that smaller entities in the banking space need to tread, to keep themselves competitive.

Post merger scenario
The merged entity, once the unison of Centurion Bank with Bank of Punjab is solemnized, will be called ‘Centurion Bank of Punjab’. With as asset size of Rs 94 bn, the bank will have a comfortable capital adequacy ratio of 16% to trigger its growth. With a network of 236 branches and 382 ATMs, the bank will also have a wide reach across all geographies in the country. What is most noteworthy is the fact that the bank will enjoy one of the highest net interest margins (4.8%) in the sector (NIM of HDFC Bank was 3.8% in FY05). However, the net NPA to advance ratio of 3.6% raises some concerns on the asset quality of the bank.

Merged synergies
(Rs m)
Centurion Bank Bank of Punjab Centurion Bank
of Punjab
Total assets 44,901 49,049 93,950
Deposits 35,304 43,066 78,370
CAR (%) 23.1% 12.6% 16.1%
NIM (%) 5.5% 3.5% 4.8%
Networth 5,114 1,846 6,960
Net NPA/advances (%) 2.5% 4.0% 3.6%
Branches (nos.) 99 137 236
ATMs (nos.) 157 225 382
Employees (nos.) 1,300 1,900 3,200

How do the valuations compare?
The stock of Centurion Bank has a face value of Re 1 each while the book value per share is Rs 5. Against this, the face value of Bank of Punjab shares is Rs 10 and the book value is Rs 17.6. Given the swap ratio of 9:4 (approved by the boards of both the banks), the shareholders of Bank of Punjab (BoP) will receive 9 shares of Centurion Bank of Punjab against every 4 shares of BoP. Given this, the total number of shares in the books of the merged entity will be 1,249.3 m with a networth of Rs 6,960 m. Thus the adjusted book value of the merged entity (Rs 4.4 per share) will be slightly higher than that of Centurion Bank (Rs 3.4 per share in FY05).

Consolidated valuations…
  Centurion Bank Bank of Punjab
Shares (m) 1,013.0 105.0
Book value (Rs) 5.0 17.6
Swap ratio (4:9) 9 4
Shares* (m) 1,249.3  
Networth* (Rs m) 6,960.0  
Net NPAs* 1,407.5  
Adj. book value/share* (Rs) 4.4  
* relates to the merged entity Centurion Bank of Punjab

Notwithstanding the fact that the merged entity will continue to be one of the smaller banks (in terms of asset size), some of its financial parameters compare very favorably to its peers. While most other banks will need to look for Tier II funding to hike its capital adequacy ratio (CAR), Centurion Bank of Punjab (CBoP) will already have a comfortable CAR to sustain its asset growth. Also the bank’s NIMs will by far be the highest in the sector. However, given the fact that interest rates are keeping an upward bias, the sustainability of the same is questionable. Despite a smaller asset book, the bank will have a relatively larger network of branches. There might, however, also be a flipside to it as this might swell the bank’s cost to income ratio.

On a comparitive basis…
FY05UA CBoP* Kotak Bank HDFC Bank UTI Bank OBC
Total assets (Rs bn) 93.9 58.4 536.9 362.5 517.5
NIM (%) 4.8 1.2 3.8 2.9 3.4
Net NPAs (%) 3.6 0.3 0.2 1.1 1.1
CAR (%) 16.1 12.8 12.0 12.7 12.0
No.of branches 236 38 467 339 1,117
Adj book value/ share (x) 4.4 120.9 132.7 74.3 95.3
P/ABV (x)**   3.3 4.7 3.4 2.7
* CBoP = Centurion Bank of Punjab
** Considering prices as on 1st July 2005

What’s our view?
Most of the private banks that will be comparable to Centurion Bank of Punjab enjoy an average valuation of 3.5 times adjusted book value. Considering this, if we assume that the merged entity will be assigned a valuation of 3.5 times adjusted book value, the price post merger will remain at Rs 15 to Rs 16 levels.

In our view, with the merger, Centurion Bank will get the requisite scale and reach (in northern markets) that will help it grow its business. This is especially pertinent given the fact the bank is largely retail focused. Garnering additional low cost deposits (45% of Centurion Bank’s deposit book in FY05) will also help the bank maintain its NIMs. Going forward, with a better asset quality and attractive return ratios Centurion Bank of Punjab certainly holds potential for being one of the most promising private banks in the country.

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