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IDBI Bank: Turning a new leaf!

Aug 19, 2004

IDBI Bank, promoted by India's largest financial institution IDBI (soon to be converted in to a bank), is one of the fastest growing banks in India. IDBI Bank, has got a strong focus on the retail segment, especially the housing loans segment. Retail assets constituted close to 40% of total advances in FY04. IDBI Bank's quality of assets is one of the best in the industry and is comparable with the likes of HDFC Bank. IDBI Bank has recently announced a merger with parent IDBI and considering the terms of the merger, this action is likely to be beneficial for both the entities.For one, 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 Reserve Bank of India (RBI) stipulated 9%. This will enable the new entity to keep its growth momentum intact.

That apart for any bank the size of the balance sheet is very important as it helps the bank to attract larger deals. For instance, a bank can offer loan guarantees based on the size of its balance sheet. The larger the balance sheet, larger the guarantee the bank can offer to its clients and this will help it to improve upon its non interest or fee based income streams. A larger balance sheet also helps to improve the perception of the bank (regarding its strength and viability) among its customers and helps in generating goodwill.

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 by the year-end. IDBI Bank's growth was limited by its reach. 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.

However we would like to point out that before the merger can become a success, the managements of both the entities will have to deal with certain issue like that of integrating two inherently different kind of entities (at least in the way they operate). One of the key challenges for the new entity will be the different management styles of the two entities. IDBI is a public sector undertaking and the workforce is used to work in a different way, as compared to its more market-oriented subsidiary IDBI Bank. The new entity will also have to deal with the discrepancy in remuneration between the two organisations. The effectiveness of the merger hinges on these issues. Also, the new entity will have to integrate operations in to a common core banking solution (Finacle in this case) to totally integrate all operations and systems. This is not an easy task and will be a time consuming exercise. While this merger is a positive for the shareholders of both the entities, one needs to realise that shareholders will only see the benefits of this merger if the same is managed efficiently.

IDBI Bank's stock is trading at Rs 45, an adjusted price to book value multiple of 1.6x (FY04 book value). Read more on how the merger is likely to impact IDBI Bank in the future in our updated research report.

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