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IDBI: Merger gains

Aug 12, 2004

Nearly three years since the last mega merger in the banking sector, there is another mega merger on the cards and we are referring here to the merger announced between the largest developmental financial institution, IDBI, and one of the most efficient private sector banks in the country, IDBI Bank. After nearly a year of uncertainty the boards of both the entities finally agreed to a merger, but after a larger clean up (Rs 90 bn) of the balance sheet of the troubled IDBI. The proposed merger is likely to benefit both the entities in different ways and it is likely to be beneficial to the shareholder of both the entities. As far as IDBI Bank is concerned, in one go the merger will solve issues like size of balance sheet, reach and capital adequacy. IDBI has a capital adequacy of nearly 18% compared to just over 9% for IDBI Bank. The merged entity is likely to have a capital adequacy much better than the RBI stipulated 9%. This will enable the new entity to maintain its growth momentum intact.

The merger will also give the new entity the much-needed reach across the country, as the parent IDBI is likely to have nearly 100 branches be the year-end. IDBI Bank was limited by its reach and the merger will solve the reach impediment to an extent as on a combined basis, the new entity is likely to have over 200 branches and over 300 ATMs across the country.

As far as IDBI is concerned, the biggest and most crucial benefit of the conversion into a bank and consequently, the merger with IDBI Bank will be access to low cost retail deposits like current and savings deposits. Since IDBI was not a bank earlier it could not access low cost savings and current deposits, which prevented it from bringing down its cost of capital beyond a point and this reduced the profitability of its operations. With the merger the new entity will have a growing retail customer base of nearly 1 mn and growing at a fast pace. The low cost current and savings deposits are likely to reduce the interest cost of the new entity significantly and this will improve its profitability further. Currently IDBIs net interest margins stands at just over 1% compared to over 3% for IDBI Bank.

To get a better picture of the benefits or otherwise of the merger read our research report on IDBI, which has been updated on our website.

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