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ICICI Bank: Banking on Sangli - Views on News from Equitymaster
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ICICI Bank: Banking on Sangli
Dec 19, 2006

Vindicating the necessity for consolidation in the sector, a number of smaller banks have been seeking refuge in their larger counterparts. The fact that they offer their acquirers an attractive franchise in the under penetrated rural areas (that the latter have limited presence in) and a ready employee and customer base - makes them all the more attractive. The latest case in point is the acquisition of Sangli Bank by the private sector behemoth ICICI Bank. As consideration, ICICI Bank needs to issue 3.45 m shares (swap ratio of 100:925) to the shareholders of Sangli Bank, which works out to Rs 3 bn at ICICI Bank’s current market price. While the said consideration is at a considerable premium to Sangli Bank’s adjusted networth, the merger is not likely to have a material impact on ICICI Bank’s financials. This seems to be a strategic move by ICICI Bank, which will give it foothold in the rural and semi-urban areas of Maharashtra and Karnataka with Sangli Bank’s 194 branches.

About Sangli Bank

Sangli Bank is an unlisted private sector bank with presence in the states of Maharashtra and Karnataka. At the end of FY06, Sangli Bank had incurred a loss of Rs 290 m and had a balance sheet of Rs 21 bn. The accumulated losses in the bank’s books were to the tune of Rs 590 m at the end of FY06. The bank’s net NPA ratio stood at 2.3% of advances and capital adequacy (CAR) was 1.6%. Sangli Bank had 198 branches, including 158 branches in Maharashtra and 31 in Karnataka. Approximately 50% of the total branches are located in rural and semi-urban areas. The bank has approximately 1,850 employees.

Benefits accruing to ICICI Bank

Although Sangli Bank’s asset size is too insignificant to materially impact ICICI bank‘s balance sheet, the former’s franchise is considerably accretive to ICICI Bank’s own. Also, despite the high delinquency rate of Sangli Bank, its relative insignificance to the size of ICICI Bank’s advances will not impact ICICI Bank’s asset quality.

FY06 (Rs m) Sangli Bank ICICI Bank % of ICICI Bank
Branches (nos) 194 614 31.6%
Employees (nos) 1,850 31,500 5.9%
Advances 8,800 1,461,631 0.6%
Deposits 20,000 1,650,830 1.2%
NPAs 200 10,530 1.9%
NPA (%) 2.3 0.7 328.6%
Net worth 250 222,060 0.1%
Source: Sangli Bank website, ICICI Bank

Sangli Bank has not been able to grow its balance sheet over the last two years due to its capital (CAR) constraints. The same is visible from the fact that its business per branch was only Rs14 m in FY06 as compared to Rs 5,000 m for ICICI Bank and Rs 400 m to Rs 600 m for smaller PSU banks like Andhra Bank and Allahabad Bank. We assume the same impacting ICICI Bank’s efficiency ratios to some extent. Also, given the fact that Sangli Bank’s networth has been 80% eroded by the loss assets in its books, the high valuation accorded to the same is likely to impact ICCI Bank’s networth.

Impact on ICICI Bank
1HFY07 (Rs m) Pre-merger Post merger
Business/branch 5,069.2 3,887.7
Business/employee 98.8 94.2
Net NPA /advances (%) 0.72% 0.73%
Adj. Book value (Rs) 259.4 255.9

Evaluating the cost of acquisition…
ICICI Bank’s valuation of Sangli Bank at 60 times the latter’s FY06 adjusted book value of Rs 1.6 per share certainly looks very steep. The same, however, compares reasonably in terms of payment per branch, when compared to some of the recent deals of acquisition of smaller banks by their larger PSU or private sector counterparts.

While acquiring a bank gives the acquirer a ready footage in the said geographies with an existent client base, which otherwise would take them a couple of years to build, the cost of such acquisition needs to be reasonable. Given that the cost of setting up a greenfield branch is anywhere between Rs 3 m to 5 m in the urban areas, an average payment of Rs 15 m (despite the fact that 50% of Sangli bank’s branches are in rural areas) certainly makes the valuations appear stretched.

Acquirer
(Rs m)
Acquired
bank
Compensation
1
Net worth
2
NPAs
3
Net compensation
1- (2-3)
Branches
acquired
Payment /
branch
ICICI Bank Sangli Bank 3,001 250.0 200.0 2,951 194 15.2
Centurion BoP LKB 3,400 1,631.0 676.6 2,446 112 21.8
IDBI UWB 1,500 791.5 2,273.0 2,982 230 13.0
Source: Company, Equitymaster research

Having said that, although we see the acquisition having a neutral impact on ICICI Bank’s valuations, in the medium term, the same can prove to be value accretive only if ICICI Bank can effectively merge the operations of Sangli Bank with itself and leverage its rural presence.

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