A Costly Deal

Bank of Rajasthan (BoR) has always been in troubled waters. May it be the battle between two business groups for acquiring a controlling stake in the bank in year 1996 or be it the financial discrepancies on the part of its promoters in the year 2000 or be it the arrest of its promoters for carrying out fraudulent activities in 2003, the bank has always been in the news for the wrong reasons. But if you feel that all this was a long time ago, then think again. Recently, the bank made it to the news again for the wrong reason when it was penalised with a sum of Rs 25 lakhs by the RBI on account of rule violations. It was revealed that BoR had violated certain property transactions and anti-money laundering norms

Further, in December 2009, the declared stake of the promoters was 28 per cent, while as per the SEBI it was 55 per cent. As a result, the SEBI had banned the bank’s promoters from dealing in the securities market. While the matter was still fresh in the memory of the investors, the RBI ordered a special audit of its accounts. Investors know that such special audits are only ordered for when the RBI has serious issues with a bank. The impact of the same was clearly visible since the counter remained an under-performer in the market.

However, all of a sudden, the sentiments in the counter changed and the scrip started hitting the upper circuit, touching a high of Rs 181. The reason behind the sudden spurt was its proposed amalgamation with India’s largest private sector bank, the ICICI Bank. The swap ratio of 25 shares of ICICI Bank for 118 shares of BoR was favourable for the bank’s investors. Estimates show that the ICICI Bank would be paying around Rs 3,050 crore for the BoR which has 463 branches and 111 ATMs. While the ICICI Bank has stated that the valuation is in line with the market capitalisation per branch of old private sector banks in India and it also compares favourably with the relevant precedent transactions, we are a bit skeptical about the same.

High Valuations
The ICICI Bank has paid Rs 6.60 crore per branch which is surely less than Rs 8.70 crore for Karur Vysya Bank and Rs 7.80 crore for Federal Bank. But it is way ahead of Rs 2.8 crore for South Indian Bank, 2.90 crore for Lakshmi Vilas Bank and Rs 3.60 crore for Dhanalaxmi Bank. The noticeable factor is that none of these banks has got a dented history. Further, the BoR also lacks in various other parameters. Its net worth per branch is the lowest, deposits per branch are also on the lower side and even the CASA per branch is not so impressive. (See Table: Per Branch Analysis – Old Private Banks) Further, ICICI Bank has opened 580 new branches since 2009 at an average cost of Rs 1 crore. So the amount seems to be on the higher side.

Comparatively Speaking
The deal also looks expensive if we look at other such transactions that have happened in the recent past. While IDBI Bank paid just Rs 0.60 crore per branch while acquiring United Western Bank, Centurion Bank of Punjab (CBoP) paid Rs 3 crore per branch to Lord Krishna Bank (LKB). Further, ICICI Bank itself paid only Rs 1.50 crore per branch to acquire Sangli Bank. Only HDFC Bank paid Rs 24.10 crore per branch for CBoP. One may argue that most of these banks had gone bust except for a growing entity like CBoP. But we are of the opinion that since BoR has a past that it cannot be proud of, it should not be treated differently. The book needs to be adjusted for the re-assessment of BoR’s NPAs by ICICI Bank.[PAGE BREAK]

Additionally, the value per deposit of 0.20x is high as compared to 0.18x of Sangli Bank, 0.05x of UWB and 0.17x of LKB. Also, the implied valuation of BoR at 4.80x book value appears expensive. There is one more question that still remains unanswered. If HDFC Bank paid a higher amount for CBoP, why did it refrain from buying BoR? Initially, it was in the race to make this acquisition but then surprisingly opted out in the later phase. All this only raises questions about why ICICI Bank has gone ahead with the amalgamation as there were certain other better choices. The market grapevine suggests that there were certain political pressures which forced ICICI Bank to go ahead with this rather shaky deal.

Impact On Icici Bank
The balance sheet size of BoR is significantly smaller (around 5 per cent) than ICICI Bank. Consequently, we do not expect any material impact on the asset profile of ICICI Bank. But one thing is for sure: The increase of 23 per cent in the branch network to 2,463 branches seems to be value accretive for ICICI Bank. The equity dilution for ICICI Bank is expected to remain at a meagre 3.1 per cent as at the end of FY10. However, the increasing level of NPAs for both the banks remains a key concern. The gross NPAs for ICICI Bank were to the tune of 4.4 per cent, while that for BoR were valued at 2.84 per cent. This does seem to be an issue for ICICI Bank.

Complicated Process
A few of the shareholders of BoR have objected to its proposed merger with ICICI Bank over a long pending dispute in the bank’s ownership structure. In 1999, the Tayal family bought a significant stake in BoR. But this deal was challenged by an individual shareholder who had also sought SEBI’s intervention, asking for an open offer for the minority shareholders. The same investor has filed a case with the Supreme Court. So the going is expected to be tough in terms of any regulatory framework. Even the employees of BoR are against the amalgamation and they would prefer a merger, if necessary, with a state-owned bank. Actually, they have cited cultural differences and fears of job losses if ICICI Bank takes over. Moreover, allegations of insiders’ trading for scrips of BoR will only make the matter worse for ICICI. In our opinion, although it is value accretive for ICICI in mid-term, the policy issues are expected to be major constraints for the proposed merger.