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ICICI Bank: Marriage to benefit?

Dec 11, 2000

ICICI Bank has announced a merger with the 57-year-old Bank of Madura Ltd. (BOM) in an all share deal. The boards of the both the banks have approved the merger and decided the share exchange ratio of two shares of ICICI Bank for every one share of BOM. The shareholders of BOM stand to gain with this merger ratio. BOM with an extensive network of 263 branches has a significant presence in Southern India. The merger will enable ICICI Bank to spread its network (currently 106 branches) to 16 states without seeking the RBIís permission for branch expansion.

The merged entity will have an asset base of over Rs 160 bn and deposits base of over Rs 131 bn. The merger will give ICICI Bank a huge presence in the South which is an important market given the high rate of economic development, as most of the technology companies are South based leading to higher income per head.

Financial Snapshot
(Rs m)ICICI BankBank of Madura
Total assets 120,630 39,880
Deposits 97,280 33,950
Total revenues 12,650 4,030
Profit after taxes 1,467 524
Number of shares (m)196.811.8
FDEPS (Rs)7.5 44.5
DPS (Rs)1.55.5
Book value/share (Rs)61.9232.8

In terms of financials also BOM compares well with ICICI Bank. Both the banks have high capital adequacy ratios (CAR), compared to 9% stipulated by the RBI. This will allow the combined entity to grow efficiently. However, BOMís non-performing assets (NPAs) ratio to net advances is comparatively higher than the ICICI Bank. NPA ratio is a critical factor in measuring the performance of banks.

After the merger, the total number of employees of the bank will increase to 4,000 (2,600 employees of BOM). Although in terms of computer literacy BOM is likely to be able to cope up with the tech savvy ICICI Bank, the key concern would be integrating the widely varied cultures prevailing in the two banks. Also the productivity per employee of the combined entity may come down after the merger.

Key Ratios
ParticularsICICI BankBank of Madura
NPAs as a % of net advances1.5%4.8%
Interest spread as a % of total assets1.5%2.3%

The current market capitalization of ICICI Bank at Rs 33 bn is 22 times higher than the market cap of BOM. The merger ratio is influenced by the book value, level of NPAs, the technology advancement of ICICI Bank, geographical presence and the productivity per employee. If the merger ratio turns out to be favourable, the shareholders of BOM stand to gain.

Comparative Valuations
ParticularsICICI BankBank of Madura
Market Price (Rs)170132
PER (x)22.73.0
Dividend yield0.9%4.2%
Price/Book value (x)2.70.6

ICICI Bank has found synergies with BOM in terms of geographic base and customer base (BOM currently has over 1 million customer base). Also based on the Price/Book value ratio and PER, BOM trades at a significant discount compared to other private sector banks. Last year, HDFC Bank acquired Times Bank triggering consolidation in the banking sector. The recent announcement by ICICI Bank clearly points out one thing - there is value to be unlocked in many old private sector banks, which are fundamentally strong and are available at low valuations in the markets.

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