HDFC Bank is India's second largest having an average Return on Asset of 1.4%.
The bank has emerged as the second largest player in the retail arena (after ICICI Bank). With a growing branch network and expanding retail market, the bank has attained extensive expertise in the retail market. At end-Dec.’07, HDFC Bank’s retail loans constituted 53% of its loan book.
The corporate portfolio is more biased towards highly rated companies and the SME supply chains.
HDFC bank has been unable to add to its branch network over the past one year on account of non receipt of branch licenses from the RBI.
HDFC Bank’s share of low cost deposits stands at 51% as of December 2007, which is the most enviable feature vis-à-vis peers.
HDFC Bank’s asset quality (net NPAs at 0.4% of total advances) is very healthy.
Corporate - 47%
Retail - 53%
Deposit break - up
Term - 49%
Current - 26%
Saving - 25%
Centurion Bank of Punjab – a brief profile
CBoP is a fast growing new generation private sector bank.
CBoP has a strong and experienced management team. The management has demonstrated a marked capability to integrate diverse organizations by successfully merging Bank of Punjab with itself. It had recently acquired Lord Krishna Bank, integration of which with CBoP operations is currently underway.
The bank follows a retail focused strategy with SME as a strong second engine.
The fee income share, at 40% as of December 2007and emanating from third party distribution of financial products, wealth management and foreign exchange business, is one of the best in the industry.
CBoP has an average CASA of 25% – a function of an improving but yet underutilized network franchise. A latent significant operating leverage continues to be the key attraction of the bank.
Corporate - 40%
Retail - 60%
Deposit break - up
Term - 75%
CASA (Current Account & Saving Account) - 25%
While the swap ratio of 1:29 for HDFC-CBOP merger turned out to be more favourable for HDFC Bank than expected by the market, the merger appears to be long-term positive on market cap to branch basis.
The market cap to branch ratio of HDFC Bank is Rs.721m where the same for CBOP is Rs. 238m. Hence, HDFC Bank has been able to buy the franchisee of CBOP at almost one-third of what the market is currently giving to its own franchisee.
If HDFC Bank manages to improve the productivity of these branches to even half the levels of HDFC Bank branches, the merger will become positive in longer term.
It is expected that HDFC Bank will take a one-time charge of ~Rs3.5bn – to be netted off against reserves – in order to clean up CBoP’s balance sheet at the time of the merger and to account for the merger related expenses. While the merger would be EPS dilutive for HDFC Bank in the interim, more clarity is required in terms of the initial write-off the entity would have to take.
The bank has been valued at 4.7x FY08E BV. Given the fact that the profitability ratios of CBoP are quite low, this looks an expensive proposition for HDFC in the short run. Thus the deal is a profitable deal for CBoP who in all probabilities would have sold out to a foreign player past 2009.
Positives from the Merger
HDFC will get an access to 394 branches of CBoP and an increased presence in southern and northern states. At present, 170 of CBoP’s branches lie in the North, concentrated in the National Capital Region (NCR, 55), Punjab (78), Haryana (28); 150 of its branches are situated in the South, mainly in Kerala (91). The merger would provide the HDFC Bank with greater access to the North (Punjab and Haryana) as well as the South (particularly Kerala), thereby strengthening its presence in those regions.
Apart from the strong retail focus of both the banks, CBoP’s strong SME relationships will complement HDFC bias towards highly rated corporates thus expanding HDFC’s base.
The merger will result in the creation of India’s 7th largest bank, just behind public giants like Bank of Baroda, Bank of India.
An important gain for HDFC Bank is induction of a strong and capable management team with extensive industry experience and proven capabilities.
Post Merger Scenario
Retail segment will continue to be the main focus for the combined entity and would be the crucial growth driver.
Post merger of HDFC-CBOP, HDFC’s stake in HDFC Bank is projected to fall to 18.7% (including ESOPs allotment). However, HDFC Bank is expected to issue 26.3 m shares to HDFC on preferential basis, which will enable HDFC to maintain its stake of 23.28% post merger. Hence, HDFC is expected to infuse around Rs.39bn to HDFC bank to maintain its current ownership.
Due to an influx of 394 branches from CBoP, there will be a significant increase in the number of branches for HDFC. There is significant scope for improvement in utilization of the branch network, as branch/ employee productivity is still way below that for the peer group. As the combined entity leverages the CBoP’s branch network, the opex to average asset will continue to trend down. The opex to average asset is expected to decline from 3.4% in FY08 to 3.28% in FY10.
CBoP currently has a weaker asset profile with net NPAs of 1.6% as against 0.4% for HDFC Bank. Going forward, HDFC Bank (combined entity) would aim to maintain its NPA profile at these levels, which would require a charge of ~Rs2bn. In addition, it is expected that HDFC Bank would provide for another Rs1.5bn towards any potential NPAs.
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