The boards of HDFC Bank Ltd and Centurion Bank of Punjab Ltd (CBoP) on Monday approved a swap ratio of one share of HDFC Bank for 29 shares of CBoP for their proposed merger. The boards will meet on 28 February to finalize the merger scheme.
On the Bombay Stock Exchange, the shares of CBoP lost 14.45% to close at Rs48.25 while those of HDFC Bank fell 3.52% to close at Rs1,422.70 even as the Sensex, the benchmark index, rose 1.74%.
Housing Development Finance Corp. Ltd (HDFC), the promoter of HDFC Bank, will infuse Rs3,900 crore capital in the bank post-merger to maintain its stake. The mortgage firm owns a 23.28% stake in HDFC Bank but it will come down to 19% post-merger.
According to HDFC chairman Deepak Parekh, the bank was looking for an appropriate merger opportunity that would add scale, geography and experience to its franchise. The merger process will take four-five months as both the banks would need approvals from their shareholders and regulators. The top brass of the banks claimed the discussions were completed in a “matter of weeks and not months” as both parties felt that they were a perfect fit for each other.
Aditya Puri, managing director of HDFC Bank, said his bank did “examine others” before zeroing in on CBoP.
The combined entity would have a nationwide network of 1,148 branches (the largest among private sector banks), a deposit base of around Rs1.2 trillion and net advances of around Rs85,000 crore.
The equity research arm of Merrill Lynch (India) Ltd, in a recent report said, “the proposed merger could provide a fillip to HDFC Bank’s earnings over the medium term if it is able to leverage CBoP’s deposit base and distribution more effectively. We reckon it could help potentially take return on equity to around 20% by FY10 (fiscal 2010).” In the third quarter of FY08 ending December, its return on equity was 17%.
With the economy booming, Indian banks, which can currently compete with global peers on account of efficiency and range of products, lack global scale, said Rana Talwar, CBoP chairman, who owns 3.4% stake in the bank through Sabre Capital. “To achieve global scale, there have to be fewer, bigger, better banks that will service all financial needs of customers.” He said Sabre Capital does not plan to exit from the merged entity in the near future.
Talwar, the former CEO of Standard Chartered Plc., will be on the board of HDFC Bank as a director. Shailendra Bhandari, the current managing director of CBoP, will be the executive director.
Talwar said the banks did not examine the “price” but the “ratio” to arrive at the valuation. The methodology, according to him, was based on parameters such as income- earning capacity, value of assets and the market price of the banks for a period of six months to one year.
The share exchange ratio was based on the recommendations of Dalal and Shah, chartered accountants, and tax consultancy and audit firm Ernst and Young Pvt. Ltd.
HDFC Bank’s Puri said the merger is based on four premises—people, products, distribution and growth.