HDFC Bank, Centurion strike merger

Swap ratio may be in the 1:20 range, say analysts

MUMBAI: It’s official: HDFC Bank will merge Centurion Bank of Punjab, a bank one-fifth its size in terms of assets, with itself in the biggest consolidation seen in private-sector banking in India in recent times.

What such a merger does is help HDFC instantly augment its branch network by 50% or 400 branches.

Centurion also has Reserve Bank of India’s permission to open another 30 branches.
Suresh Ganapathy, analyst with Deutsche Bank, said Centurion’s branch-network was the main draw for HDFC Bank.

“That’s because in India, getting a branch licence is becoming more and more difficult. HDFC Bank will certainly benefit from the move,” he said.

Fee-based income has become crucial for banks as margins in their core business of lending are on a decline due to competition and interest rate pressures.

Having a larger branch network helps distribute more products that bring in fee-based income, such as mutual fund schemes and insurance plans. The latter afford as much as 30% commission on premiums.

Centurion is already a key distributor of Aviva’s insurance products, but this income tap may close because Aviva may not be ready to tag along as HDFC owns HDFC Standard Life, a rival.

Centurion, through its merger with the Bank of Punjab in June 2005, has a strong presence in the north, specifically the cash-rich Punjab, Haryana and north Rajasthan.
Last August, it also merged the Thrissur, Kerala-based Lord Krishna Bank, which gave it 110 branches in the south.

The deal is being inked at a Centurion Bank enterprise value of $3 billion, or Rs 64 per share (Rs 12,000 crore divided by a total 187.3 crore shares), sources said.
Taking HDFC’s valuation into account, the swap ratio could be in the 1:20 range, according to an analyst with a local brokerage.

The current market capitalisation of HDFC Bank is Rs 52,263 crore, while Centurion’s is one-fifth that at Rs 10,564 crore.

The Centurion share ended down 1.5% at Rs 56.40 on Friday, while the HDFC Bank share wound up 4% lower at Rs 1,474.95.

Interestingly, Centurion and City Union Bank are the only two banks in India whose face value per share is Re 1. All the banks in India have a face value of Rs 10 per share.

The merger will make HDFC Bank the seventh largest in India in terms of assets, but it would increase its balance sheet size by just 19%.

Analysts are also giving the merger a thumbs up in terms of integration of cultures. “There won’t be any problem of culture,” said Robin Roy, principal consultant, PricewaterhouseCoopers.

“The banks complement each other in terms of geographies, products, branches. CBoP will also get customers and some much need banking talent from the merger,” Roy said.
HDFC Bank will also get a entry into segments that it has been weak on like asset reconstruction and lending to small and medium enterprises.

However, the one area HDFC Bank will have to be cautious about is CBoP’s non-performing assets. CBoP’s net NPAs are a tad high at 1.69% versus 0.40% of HDFC. “They will have to be careful because CBoP has NPAs related to two wheeler loans. But on the whole it shouldn’t be a problem because they can always write it off,” Ganapathy from Deutsche said.

Incidentally, ICICI Bank was also said to have coveted Centurion, but what may have clinched the deal in end for HDFC Bank may be the close rapport that the bosses of the two banks share.

Aditya Puri, CEO of HDFC Bank, and Shailendra Bhandari, his counterpart at Centurion Bank of Punjab, have had a long association as former Citibankers. Bhandari has also worked in HDFC Bank earlier.