CONSOLIDATION IN THE INDIAN BANKING INDUSTRY- THE M & A WAY

CANARA BANK WITH

IDBI BANK

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Table of contentSr. No

Content Slide no.

1. Indian banking sector at glance 32. Merger and acquisition- Need of an hour 53. Overview of Canara bank 64. Basis of selection of IDBI bank 95. Valuation of the combined entity 106. Synergy benefits 157. Conclusion 198. Bibliography 21

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Indian Banking Sector At a Glance• Backbone of Indian economy• Banking sector Contribution to the GDP is 7.7%• 150 Participants in the sector • Global “Top 500 Banks List” includes only 17 Indian

banks• Huge differentiation in market capitalization of the banks• Indian banking sector is in the “growth stage” • It is expected to achieve an CAGR of around 18% by

2017• “Financial Inclusion” - a boost to the sector

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Porters Five Force Model for Indian Banking Industry

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Merger and Acquisition – Need of an Hour!

• To restructure the banks • To increase the scale of operation• To increases the competitiveness at a domestic and

international level• To increases the shareholder’s value via increased

efficiency• To attain faster growth rate• To reach untapped market• To overcome the problem of fragmentation • To attain financial leverage

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Overview of Canara Bank• High growth rate

• Skilled workforce

• Reduced labour cost

• Strong distribution & sales network

• Significant overseas presence

• Extensive networks of branches & ATMs

• Leader in the south Indian markets

• Strong liquidity profile

7

Need to restructure Canara Bank

• Fear of stagnant growth

• Poor corporate banking

• Requires pan India presence

• Enhance brand value

• Universal banking

• Lacks competitiveness

8

Potential target banks

• Saraswat Co-operative Bank• Federal Reserve Bank• Union Bank of India• IDBI

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IDBI (Advantage as a target bank)

• Strong corporate banking relationships

• First mover advantage of G-sec portal

• Strong brand name

• Diversified portfolio

• Higher productivity and efficiency

• Higher capital adequacy ratio( more than required)

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Valuation of the combined entity:

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2015 2016 2017 20180.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00

Net Profit of Canara Bank

net profit

Year

Amou

nt in

cro

res

2015 2016 2017 20180

200

400

600

800

1000

Net Profit of IDBI Bank

Net Profit

Year

Amou

nt in

cro

res

1 2 30

500100015002000250030003500400045005000

Net Profit of combined en-tity

Net Profit

Year

Amou

nt in

cro

res

Comparison of the net profit:

12

2015 2016 2017 20180

200000

400000

600000

800000

Deposits of Canara Bank

Deposits

Year

Amou

nt in

Cro

re

2015 2016 2017 20180

50000100000150000200000250000300000

Advances of IDBI Bank

Payment

Year

Amt i

n Rs

.

1 2 30

200000400000600000800000

10000001200000

Deposits of combined entity

Deposits

Year

Amou

nt in

Rs.

1 2 30

200000

400000

600000

800000

Advances of combined entity

Advances

Year

Amt i

n ru

pees

Comparison of the deposits vis-à-vis advances

13

2015 2016 2017 20180123456

EPS of IDBI Bank

EPS

Year

In R

s.

2015 2016 2017 20180

102030405060

EPS of Canara Bank

EPS

Year

Amou

nt in

Rs.

2015 2016 2017 20180

20

40

60

80

100

120

140

EPS

EPS

Year

Amt i

n Rs

.

Comparison of the shareholders value

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Purchase consideration of IDBI:

EPS CANARA 56.87

EPS IDBI 5.45

Swap ratio= 5.45 : 56.87 (IDBI : CANARA)

No. of Canara shares given to IDBI = 15,37,11,429 sharesValue of IDBI = Rs.829,27,31,576

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Financial Synergy of the Combined Entity• Economies of Scale

• Capital Adequacy Norms

• Reduction of Employee Benefit Cost

• Diversified Revenue Generation

• Faster growth rate of the combined entity

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Non-Financial Synergy of the Combined entity• Increased Customer base

• Competitive in the domestic market

• Pan India presence

• Strong Brand Name

• Universal Banking

• Closer Relationship with the government

• Superior IT Infrastructure

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Combined Entity’s Contribution To Economy

• Increase in revenues

• Decrease in costs

Increase in profits

• Increased dividend to Govt.

• Increased tax collection

More funds to Govt.

Reduce Fiscal Deficit

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Challenges of Mergers & Acquisition• Cultural differences

• Legal Barriers

• Dispute over the key managerial position

• Dilemma of the current workforce

• More focus on strategic and financial synergies

Conclusion• It will give cut throat competition to BOB and PNB

• It would be ranked as the 3rd largest bank in PSB category

• Positive synergies would help Canara to compete with SBI

in long run

• Consolidation with IDBI Bank would give Canara edge in

achieving operating efficiency

• Huge cost reduction in technology

• Branch and ATM Network Coverage in pan India

• Shareholder’s wealth maximization

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Consolidation through M&A “Consolidation alone will give banks the muscle, size and scale to act like world class banks. We have to think global and seek new markets, new classes of borrowers.” -P.Chidambaram (former FinMin)

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BibliographyNSE website http://www.nseindia.com

IDBI Bank Website http://www.idbibank.com

Canara Bank Website http://www.canarabank.com

IBEF website http://www.ibef.com

Economic Times http://www.economictimes.com

RBI website http://www.rbi.org.in

Public Sector Banks |

Open Government Data

(OGD) Platform India

https://data.gov.in/keywords/

public-sector-banks.com

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Thank you!