Mumbai: If Federal Bank Ltd has its way, it will merge Thrissur, Kerala-based Catholic Syrian Bank Ltd, or CSB, with itself before fiscal 2009 ends in March.
Federal Bank holds only a 4.99% stake in CSB, but has managed to garner the support of at least two-thirds of the bank’s stakeholders. All it needs is a CSB board resolution accepting the merger when it formally moves the proposal. At the next stage, it will not find any resistance at the shareholders’ meeting, with about 66% of them favouring the merger.
Fight for survival: Federal Bank managing director and chief executive officer M. Venugopalan. As the bank’s chief, Venugopalan had earlier set his eyes on Lord Krishna Bank Ltd, another Thrissur-based bank, but was beaten by Centurion Bank of Punjab Ltd, which paid more money. Abhijit Bhatlekar / Mint
The unanimous appointment of five directors at its annual general meeting on Friday has paved the way for the CSB board’s acceptance of the merger proposal. In the previous board, not too many directors were excited about the merger prospects but that sentiment will be buried now with new directors coming in.
The appointment of new directors without elections at the crucial annual general meeting is a strategic coup for Federal Bank managing director and chief executive officer M. Venugopalan, who strongly believes that “the only way of survival is coming together”.
“Merger is the only solution. Otherwise, in the next two-three years, small banks will become unviable,” says Venugopalan, who at 63 years is as old as his bank.
Federal Bank is not exactly small. It has an asset base of about Rs32,000 crore and a net worth or equity and reserves of Rs3,926 crore, the highest among India’s old private sector banks. Venugopalan, however, does not like the idea of being clubbed with “old” private banks. “We are the fourth largest private bank in India on the basis of our net worth,” he says.
The country has two sets of private banks—one has been around for decades and the other, the so-called new-generation banks, which were given licences to set up shop in mid-1990s.
The 54% foreign-owned Federal Bank had raised Rs350 crore in 2006 through an issue of global depository receipts and another Rs2,140 crore early this year through a rights issue. It has pushed its capital adequacy ratio to 22%, against the regulatory requirement of 9%, and given it enough muscle to buy a small bank with cash. “We are ready for all-cash as well as share-swap deal,” says Venugopalan.
Before taking over this assignment in May 2005, Venugopalan headed the Mumbai-based Bank of India, a large state-owned bank, and was keen to merge it with another Mumbai-based state-run bank, Union Bank of India, but did not succeed in the face of stiff political resistance as the Left parties, the erstwhile partners of the Congress-led United Progressive Alliance government, felt the merger would lead to job losses.
As Federal Bank chief, Venugopalan has been exploring all options to build scale. First, he had set his eyes on Lord Krishna Bank Ltd, another Thrissur-based bank, but was beaten by Centurion Bank of Punjab Ltd, which gobbled up Lord Krishna, paying more money. Ultimately, Centurion Bank of Punjab merged with HDFC Bank Ltd, India’s second largest private sector lender. “I was willing to pay Rs275 per share or even a little more but Lord Krishna was asking around Rs320 per share. I did not pay and now HDFC Bank has entered Kerala and giving us tough competition,” says Venugopalan.
Acquisition, for him, is a pre-emptive play. “If we do not acquire, other banks will buy Kerala-based banks and make our life difficult as competition will get tougher,” says Venugopalan.
He also cites instances of Mumbai-based private banks coming to Kerala and discreetly making offers to them, but does not like to name them. To block such deals in future, he has acquired 4.99% stake each in three banks in southern India in the past one and a half years—CSB and South Indian Bank Ltd in Kerala and Laskhmi Vilas Bank Ltd in Tamil Nadu—the possible takeover targets.
Under Indian banking law, no entity can buy more than 5% in any local bank. “Such stakes give me an entry (into these banks) and I can keep a close tab on them. I follow their operations and also get to know who is making enquiries about them,” says Venugopalan.
Federal Bank in August bought the 4.99% in CSB from Thailand-based Surachan Chawla, who had in 1994 bought a 33% stake in the bank. However, neither the Foreign Investment Promotion Board nor the Reserve Bank of India, or RBI, approved the share transfer to Chawla, a decision he challenged.
It was only earlier this year that RBI approved the share transfer, subject to the caveat that Chawla will only hold 10% and sell the rest. Chawla now has a 28% stake. It means that he needs to sell another 18% to pare his stake to 10%.
Federal Bank seems to have got an assurance from him on his stake sale as well as from some of the funds and individuals who hold substantial stakes in CSB. Venugopalan declines to comment on finer details of his strategy but says he is ready to pay a premium on the book value of CSB shares or can go for a share swap arrangement.
CSB, an unlisted entity, has a net worth of Rs305 crore. Shares of Federal Bank closed 2.06% lower at Rs206.40 each on the Bombay Stock Exchange on Friday. At this price, Federal Bank has a market capitalization of Rs3,528.2 crore.
Federal Bank has a network of 617 branches, and 370 of them are in Kerala. It has some 55 branches in Mumbai, 35 in New Delhi and 30 in Kolkata. The 78-year-old CSB has 200 of its 360 branches located in Kerala and at least 80 of them are in the same locations where Federal Bank is also present.
This means that even after this acquisition, Federal Bank will continue to be perceived as a Kerala bank and won’t acquire a national profile. Venugopalan is aware of that but still wants to go ahead with his acquisition plan as he does not want local banks to be taken over by others, making life difficult for Federal Bank by increasing competition. “One needs to be proactive,” he says.
Federal Bank would have got a better presence in western India had RBI agreed to its proposal of taking over the troubled United Western Bank Ltd in 2006, which has more than 200 branches in Maharashtra. It, however, took over Ganesh Bank of Kurundwad Ltd in 2006, which had 24 of its 32 branches in Maharashtra and the rest in Karnataka.
South India has the highest branch concentration, accounting for about 28% of the all-India branch network. Kerala’s share in the regional branch network is 19%.