PRESENTATION ON

PROPOSED

IDBI BANK-CORPORATION BANK

MERGER
PRESENTED BY: ARUN.B.M
PARAM

VENKATESH
 HISTORY OF INDIAN BANKING

 Banking in India originated in the first

decade of 18th century with The General
Bank of India coming into existence in
1786.
 By the 1960s, the Indian banking industry
has become an important tool to facilitate
the development of the Indian economy.
 Continued…

 During fourth year plan the then prime minister

Indira Gandhi issued an ordinance and
nationalized the 14 largest commercial banks.
 In the early 1990s the then Narasimha Rao
government embarked on a policy of
liberalization and gave licenses to a small
number of private banks.
 UTI , ICICI Bank and HDFC Bank.
 Continued…
 This move, along with the rapid growth in the
economy of India, kick started the banking sector
in India, which has seen rapid growth with strong
contribution from all the three sectors of banks,
namely, government banks, private banks and
foreign banks.
 Currently, India has 88 scheduled commercial
banks (SCBs)
 28 public sector banks
 29 private banks
 and 31 foreign banks.
 HISTORY OF CORPORATION BANK

 Corporation Bank is one of the oldest Banking

Institutions in the Dakshina Kannada district of
Karnataka and in India.
 A step was taken by Shri Khan Bahadur Haji
Abdullha Haji Kasim Saheb Bahadur, a
businessman of Udupi.
 12th of March 1906 with a group of philanthropist
founded the ‘Canara Banking Corporation of
Udupi Limited’.
 HISTORY OF IDBI

 The birth of IDBI bank took place after RBI

issued guidelines for entry of new private
sector banks in January 93.
 The Reserve Bank of India conveyed it's in
principle approval to establish IDBI bank
on February 11th, 1994. Thereafter the bank
was incorporated at Gwalior under
Companies Act on 15th of September 1994.
 Reasons behind the merger

IDBI-CORP
 IDBI bank has shown keenness in acquiring
another bank either in public or private
sector.
 Corporation Bank having wide branch
network, superior technology usage and
wide product base appear as a suitable
target for the acquisition.
 Financial Statement Analysis

‘CAMEL’ model is used for the quantitative

analysis to determine the financial and
competitive position of the two banks.
C- capital adequacy
A- asset Quality
M- management efficiency
E- earnings
L- liquidity
 Synergies of the Merger

Positives: (Superscripts below refers to CAMEL

ratios)
(1)Improved Debt to Equity ratio after merger
thereby decrease gearing on its balance sheet.
(1)
(2) Reduced exposure to market by investing
more in G-Sec or risk free securities.(2)
(3) Lowering of NPA’s in IDBI.(3,4)
(4) Utilization of better recovery mechanism of
NPA’s.(5)
(5) Increase in the net-worth of the bank.(6)
 Continued…
(6) Better utilization of the working funds.(7)
(7) Surge in Net Interest Margin (NIM) and hence
Improved Profits.(8,9)
(8) Improved Return on Assets.(10,11)
(9) Significant Improvement in the Rural Branch
Network from existing 10.5% to 16% (Annexure I)
which will lead to better penetration of already
existing Agri Business product portfolio.
 Negatives
(1) Corporation Bank has poorest Advances to Assets Ratio.
(2) Business per Branch of the merged entity to be decreased
by 45% in case of no foreclosures of branches.
(3) Business per Employee to be decreased by 25% in case of
no lay-offs.
(4) Assets per Branch of merged entity to be decreased by
49%
(5) Assets per Employee to be decreased by 29%.
(6) Profits per Branch of merged entity to be decreased by
32%
For Detailed Analysis refer Annexure II
 Legal Hurdles of the Merger

Banking regulation(BR) Act, 1949

The Act provides for two types of
amalgamations:
1.Voluntary(sec 44A of the BR Act)
2.compulsory
Three Stage Dividend Discount Model

It is the most general of the models because

it does not impose any restrictions on the
payout ratio and assumes an initial period of
stable high growth, a second period of
declining growth and a third period of
stable low growth that lasts forever. Figure
below graphs the expected growth over the
three time periods
Implicit Assumption:
Only dividends are paid. Remaining portion of
earnings is invested back into the firm, some in
operating assets and some in cash & marketable
securities.
 DDM Valuation of Corporation Bank

Corporation Bank reported a return on equity of

17.52% for FY08 and paid out dividends per share of
Rs 10.50 year (on reported earnings per share of Rs
52.33). We will assume that its bigger asset base
build over by high debt will allow the bank to
maintain its current return on equity (low by industry
standards) and retention ratio for the next 7 years,
leading to an estimated expected growth rate in
earnings per share of 10%.
 Payout Ratio = Dividend per share/ Earning per share =
10.5/52.33= 20.06%
Expected Growth rate = Retention ratio * ROE =
(1- 0.2006)* 17.52% = 14.00%
Analyzing & then normalizing the normal EPS growth
rate we found, that actual growth rate is 10.02% and not
14% as calculated for the annual one.
The estimated earnings and dividends per share
each year for the next 15 years
 EV/EBITDA Multiple:

Enterprise value (EV) is total company value (the

market value of debt, common equity, and preferred
equity) minus the value of cash and investments. Also,
EV= Market Capitalization+ Market Value of Debt-
Cash & near Cash
Numerator is enterprise value, EV/EBITDA is a
valuation indicator for the overall company rather than
common stock the analyst can assume that the
business's debt and preferred stock (if any) are
efficiently priced.
Calculations provided in the spreadsheet under the
sheet multiples valuation reflect the current market
scenario (Low Market Capitalization) of equity
thereby giving depressed valuations for both the
banks (IDBI: Rs53.48 & Corp.: 209.60). Both the
values are eroding the net worth of the company
and does not justify the real worth of both the set
of companies.
 MERGER VALUATION OF
IDBI & CORPORATION BANK
Considering the credit crisis in the global financial
markets, among the various modes by which IDBI
may finance the deal would be through all swap
deal. The reasons being:
1. IDBI having a very high gearing of almost 6.46
(D/E) makes it incapable of raising any cash from
the market. Hence, it would not be possible to go
for all cash deal.
2. With the current credit crisis, it will be almost
near impossible for IDBI bank to create an
Leverage buyout. Further, traditionally govt.
banks in India, they have never followed these
methods.
3. An all swap or swap-cash deal is more then
possible thereby maintain regulatory requirements
of over 50% Govt. holding in any scenario.
 Swap ratio

Calculated based on book value method

NOTE: Swap ratio taken into Consideration is 3.18:1 i.e. 3 IDBI share for 1 shares of
Corp Bank
 Swap ratio
Calculated using DDM valuation Prices obtained for banks

For All Swap Deal:

 valuation

• Value of IDBI= 92.37*72.34

6682.04(crores)
• Value of CORP= 311.11*14.34
4461.31(crores)
• Merger cost = 4335.40
• Combined entity:
value of (IDBI+CORP)+synergy
(6682.04+4461.31)+(60% of IDBI+CORP)
 11143.35+6686.01= 17829.36
NPV= (benefit-cost)
Benefit = value of combined-(IDBI+CORP)
=17826.36-(11143.35)
=6683.01
Cost = 4335.40
NPV = 6683.01-4335.01
= 2350.61
 Conclusion
According to us an all swap deal will allow IDBI to
use the client as well as asset base in a betterway,
also by having Corp. Bank, it will be able to
deleverage itself in the current credit crisis scenario
where most leverage banks fall the fastest.
The all swap deal will give approximately Corp.
bank a share of 39.35% in IDBI Bank. The swap
ratio of 3.27 being calculated above using both the
Book Value as well as DDM prices. The
approximate deal size obtained on the basis of the
Nov14 ,2008 current prices is 4335.4 Crores.