Wednesday, August 22, 2012

ICICI BANK: INORGANIC GROWTH

First it was the Bank of Madura. Then, it was Bank of Sangli. And now, the Bank of Rajasthan. ICICI Bank is seemingly strengthening its presence in the Indian banking space by undertaking a slew of acquisitions much like its peer HDFC Bank did in the past. by Avneesh Singh

As seen by experts, the merger, which will increase ICICI’s branch count by 463 and ATM count by 111 (adding to the bank’s existing network of 2009 branches and 5,219 ATMs), will make ICICI Bank the undisputed no.2 in the Indian banking space and the no. 1 amongst those in the private sector. [This will increase the difference in number of branches between ICICI and HDFC from just 7 in 2008-09 to 747!]. But then, the question remains – is it such a wise move as it seems on the first go?

Well, experts are still divided in opinion. While some like Vaibhav Agarwal and Amit Rane of Angel Securities say that, “Based on the swap ratio (25:118), ICICI Bank has valued BoR at a premium of 89%, which is expensive, considering the poor profitability and the recent asset-quality pressures and corporate governance issues with the Bank of Rajasthan.” On the other hand, others like Hatim Broachwala, Banking Analyst, Khandwala Securities, says, “The deal is positive because of Bank of Rajasthan’s huge branch network in northern India. Also, the price paid per branch is not a huge amount considering ICICI Bank’s renewed strength.” Clearly, the proposed merger will help ICICI Bank make its presence felt in Rajasthan, in a manner similar to how CBoP helped HDFC Bank grow in Punjab and Haryana.

However, if you look at the Mcap per branch figure (of the acquired) involved in the ICICI Bank-BoR deal, it reads better than the HDFC-CBoP transaction. Based on the swap ratio announced, the figure works out to be Rs.66 million in the former case, a lot lesser than Rs.241 million paid in the latter. But one must also consider the fact that the existing capital adequacy of BoR is on the lower side and ICICI Bank would need to infuse more capital to bring them to the desired level. Translation – the deal would dry up funds from ICICI Bank’s lockers. Worse, the bank would need atleast two-three more years to scale-up productivity in BoR’s branches.

Certainly, there is no denying that inorganic growth strategy is good for a bank like ICICI Bank in a growing economy, but going by what expected synergies indicate, it appears to be more of an inorganic strategy out of compulsion. And that isn’t what’s called following the road to glory. The dynamism in the Indian banking industry is set to go through major changes in the near future, when the Reserve Bank will start issuing new banking licenses and the expected new cash-rich entrants of the likes of the Ambanis, the Tatas and the Birlas will take competition to a new level altogether. How many more such forced takeovers will we witness from ICICI Bank? The positive side is that if the BoR buyout works for ICICI, it will prove a preparation much before the real battle begins!

A pro-active step to scale up even before competitors starts biting at your heels or a purchase of the latest headache for ICICI Bank? Two more years, and we’ll know more...


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