HDFC Bank’s acquisition of CBoP: A study

Abstract

The HDFC Bank and Centurion Bank of Punjab merger was one of its kinds in the banking industry. Until then, acquisitions in the banking industry have been in the form of either hostile takeover or a bank much superior taking over the other. This was the first time that two banks which were equals, came together for various strategic reasons. This report deals with an analysis of such mergers and tries to identify if such mergers are in future, a common practice in the Indian banking sector. The evolution of banking in India dates back to the pre independence era and the imperial bank of commerce. Post independence, the imperial bank of commerce was converted to State bank of India and later on scheduled banks were formed. Post liberalization, private banks came in to being. In the mean time, the banking regulation was formed and it evolved over time. Reserve bank of India was formed with the main objective of being a regulator and supervisor. Over time, the role of RBI also evolved and currently it is responsible for more of a macro level supervisor. HDFC Bank was formed in the year 1994. It currently has a market capitalization of Rs 60,047.36 crores. Centurion Bank of Punjab was also formed in the year 1994 but it did not see the same success as HDFC Bank or the ICICI Bank. The merger was planned such that stakeholders of CBoP would receive 1 share of HDFC Bank in exchange for 29 shares of CBoP. This follows the approval of the Board of Directors of the 2 banks as on 25th February 2008. Now, 15 months after the merger, we have computed and compared the various ratios to the pre-merger HDFC and the post-merger HDFC. The main take-away from the analysis is that all the ratios are slightly lower than our expected estimates. One reason for this could be the economic stress that the industry has been in, in the past one year. Another could be that the integration of CBoP branches and staff has not yet happened completely to an extent to fully utilize the synergies between the two firms. Over the past year, the script has consistently outperformed the market and the analysts too have given positive reviews post the merger despite apprehensions about the decline in growth of the bank as a whole. The share swap translates to a 4.1x P/B.V. and despite this the acquisition is not overpriced as there are huge financial and strategic gains to be had from the deal. Some of the salient benefits are the improved branch and distribution network and a solid NIM and CASA profile that is projected to improve in the coming 2 years as the synergies fully come into play. Apart from this the earnings are at an all time low. However, based on the track record and the rebound to more familiar EPS in the past year, one could safely say that it is bound to rise over the next 2 years. Fee Income has had a positive impact but asset quality has taken a slight hit, but it is expected to be corrected as the high risk loans run out. There have however been some significant cultural challenges in the workplace which HDFC is confident that it can tackle with ease. Even as the bank has failed to show 30%+ growth for the first time in its history, the merger has impressed analysts and stakeholders alike such that the stock market still remained extremely bullish on the future and the stock prices despite having close to 4x P/B.V. is considered to be evaluated correctly by the stock market. The industry verdict on the merger and our own are the same in that we consider it to be a success and it has achieved the things it set out to do. There might be a slight difference only in that we are slightly more optimistic on the future estimates for the growth of the company as compared to industry reports. We also estimate that by FY11, the synergies expected of the merger would be fully realized. We also feel that there this is in fact a precursor of things to come. Since there are a lot of small players in the market and demand for more operational efficiencies and stricter consumer demands as the market matures would necessitate further consolidation of which this merger might be the forerunner.