Mumbai: Shares of ICICI Bank Ltd, India’s largest private sector lender, dropped 7.2% to Rs825, its two-month low on the Bombay Stock Exchange after it announced its offer to buy the troubled Bank of Rajasthan Ltd (BoR) in an indicative share swap of 25 ICICI Bank shares for every 118 shares of BoR.
For the second successive day, the BoR stock ended 19.9% up to close at Rs119.40. The exchange’s bellwether Sensex index lost 2.77%, or 467.27 points, to 16,408.49.
Reports of most of the brokerages released on Wednesday said the proposed merger, at the indicative swap ratio, is “expensive” for ICICI Bank though, in the long term, BoR’s branch network will come in handy for expansion; at least one of them said the bank’s profitability could be hit in the near term.
Also Read | It’s a total swap of shares: Tayal
Almost all said the prime driver behind the proposed merger is BoR’s branch network.
BoR has a network of 463 branches and 111 ATMs. Around 60% of its branches are in Rajasthan. ICICI Bank has a network of 2,009 branches and 5,219 ATMs.
Audit firm Haribhakti and Co. and Deloitte Haskins and Sells will assess the valuation of BoR.
“If approved, the proposed share swap implies Rs188 per share for BoR and valuations of 2.9 times its stock price to book value per share, which is not cheap,” said an Anand Rathi Financial Services Ltd report. “Yet, at Rs6.59 crore cost per branch the deal is reasonable, at a 9% premium to that of old private sector peers.”
“The current swap ratio, ICICI Bank has valued BoR at an 89% premium to yesterday’s closing price (Rs99.50), which is expensive in our view, considering the poor profitability and the recent asset-quality pressures and corporate governance issues with BoR,” said Angel Securities Ltd. “In such an acquisition, there is downside risk from further NPAs (non-performing assets) from the target bank’s existing loan book.”
Edelweiss Securities Ltd too said the proposed swap ratio offers a 90% premium to the current BoR market price but said the price paid by ICICI Bank “reflects the significant value attached to the branch network”. “This, we believe, would be a game-changer especially for the small private sector banks which, given their branch network and non-promoter holding structures, would offer an attractive franchisee for acquirers, and hence command a premium valuation,” Edelweiss said.
Another Mumbai-based brokerage IDFC Securities Ltd said the merger could marginally dilute ICICI Bank’s earnings by around 3% in the near term. Over the medium term, however, it sees a significant value creation opportunity as ICICI Bank leverages BoR’s underutilized network of 463 branches in the northern and western region.
HSBC Securities and Capital Markets (India) Pvt. Ltd said “on a book-value basis, the potential acquisition looks expensive” but added the motive of the merger clearly is related to the branch network. At 463 branches, BoR adds 23% more branches, which otherwise could have taken up to two years to ramp up organically.
Yet another local brokerage Emkay Global Financial Services Ltd said, while ICICI Bank has used market capitalization and branch as key parameters to arrive at the swap ratio, “we believe market capitalization and deposits along with RoA (return on assets) would be more relevant to see here”.
On such parameter, many old private sector banks such as South Indian Bank Ltd, Karnataka Bank Ltd, Federal Bank Ltd should see rerating. The only difference between them and BoR is that they don’t have single largest concentrated shareholding. The promoters of BoR, according to the capital market regulator, hold 55.1% stake in the bank.
According to Emkay Global, the valuation could be high because BoR owns most of its branches. Anecdotal analysis of branch expansion by HDFC Bank Ltd and ICICI Bank shows that new branch roll-out would require investment between Rs5 crore and Rs10 crore “only if they are on leased premises”, it said.