Presentation On Idbi-corp

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 DebtCash & 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.