Impact of Recession on Bank Merger Valuation in context of
India
AftermathBig Investment banks have collapsedrescue packages were
drawn up more than a trillion US dollarsinterest rates were cut
around the world Consequences On Banking SectorIntroduction of
BASEL III Global Regulatory Std. In response to the deficiencies in
financial regulation revealed by the late-2000s financial crisis.
Chapter Introduced bank liquidity and bank leverage
But Indian banking sector is closed to implement BASEL II
Norms
Reason For Economic Turmoil Dramatic rise in mortgage
delinquencies Foreclosures in the united states with major adverse
consequences for banks and financial marketsImpact Of Recession On
Bank Merger Valuation In Context Of IndiaThe present study analyses
the difference in the valuation approaches during normal and
financial crisis period.
IntroductionObjectives of studyWhat is valuationData and
methodologyData analysisConclusion
2Introduction Reason for M&A In Banking Motivation to
increase the shareholder valueEconomies of scale Cost savings from
synergy Geographical diversificationIncreased efficiencyWhat is
Valuation Valuation means the intrinsic worth of the company &
the price at which market participants are willing to pay or
receive to a perfect sale of a business.
Valuation for a merger is done to find out the Exchange Ratio
(Swap Ratio) Company A share Value Exchange Ratio (Swap Ratio) =
Company B share Value Swap ratio is the ratio at which the target
bank receives shares of the bidder bank in exchange of shares in
the target bank.
Banks need to arrive at an acceptable swap ratio for a possible
merger.
OBJECTIVES OF THE STUDYTo analyze the difference in the
valuation of bank mergers in normal and recessionary period.
To discuss the contribution of the financial factors of banks in
the valuation.
Data and Methodology
witnessed a total of 23 deals in the post reform period.chosen 3
bank merger deals
DealMerger announcementdatePeriodICICI Bank- Bank of MaduraDec
08, 2000Pre- recessionHDFC Bank- Centurion Bank ofPunjabFeb 23,
2008RecessionICICI Bank- Bank of RajasthanMarch 18,
2010Post-recessionSource: Economic Times: January 2008 to May 2009
denotes recession period based on NSE data Hypothesis of the study
areH0: There is no significant difference in the valuation approach
during normal and recession period.H1: There is significant
difference in the valuation approach during normal and recession
period.Data Analysis
Market Value of BOMSwap Ratio Based on Market Price = Market
Value of ICICI Bank It could have derived a swap ratio .801 in
favor of ICICI bank on the basis of the market price. Bank Of
Madura122.5ICICI Bank152.9= 0.801177Bank Of Madura with ICICI Bank
(Pre Recession)Source: Annual reports of the banks of the year
2000-20017It could have been 10 shares of ICICI bank for 13 shares
of Bank of Madura, if the valuation was done on the basis of
balance sheets of both the banks. (105.3 : 45.6) The swap ratio
could have been in favor of ICICI Bank, if they had done valuation
on the basis of Non-Performing Assets (NPA) of both the banks.(1.3
: 4)
Financial Strategic Ratios Book Value, EPS (Net Profit/shares
outstanding),% NPA , Last Dividend Paid Out & CRAR Factors
influenced Swap Ratio in merger deal Deal UndefinedTo quote from
The Economic Times (as published on 9th December 2000), Swap Ratio
could be 10 shares of ICICI Bank for 13 shares of bank of Madura.
The ratio could be influenced by NPA level of the two banks.8
Cen. Bank Of Punjab with HDFC Bank (Recession Period)It could
have derived a swap ratio (56.4/1474.9) =.038 (in favor of HDFC
Bank on the basis of the market price.)
Source: Annual reports of the banks of the year 2007-2008
A slighter Less ratio 0.034 was fixed Due To CBoPs low Book
Value and EPS
And Bidder HDFC strategically gains much more like its northern
presence after merger Still Cen.bank of Punjab didnt get a
Favorable Value
Although Cen.bank of Punjab had fair NPA & fair
Profitability & very strong retail customer base (two wheeler
loans) in North India
Therefore, it can be stated that it was purely a financial
valuation and valuators ignored the strategical factors.
More weightage to financial factors than to strategical factors
during recessionary period
Deal UndefinedCen. Bank Of Rajasthan with ICICI Bank (Post
Recession Period)
Source: Annual reports of the banks of the year 2009-2010
Deal Undefined1st Deal after recession in which target
shareholders benefited i.e. target overpaid Expensive deal for
ICICI -- as premium paid was 88.5/shareIf valuation was done only
on financials like book value, market value, EPS & NPA Bidder
was more favourable ---had to pay lesser ICICI Bank strategy was
similar to prev deal --- a strong presence in the north with strong
customers base (BoR had 40% CASA A/C ) BoRs 40% CASA A/C had solely
criteria of fixation of swap ratio Recessionary periodNon
recessionary period Bidders strategy Bidders strategy (geographical
diversification & (geographical diversification & strong
cust base) strong cust base)
Target Bank had decent NPA & CRAR Target Bank had very less
CRAR In other Financial BoR is far below the ICICI bankIn other
Financial CBoP is comparable to HDFC bank
Target got undervalued due to recession as bidder stress on
fundamental factors n ignore strategic advTarget got overvalued as
bidder followedStrategic valuationConclusion
There is significant difference in the valuation approaches
during recession and normal period. In normal period, valuators
followed strategic valuation and during recession period strategic
factors were ignored.
Therefore we accept alternative hypothesis H1 in this study.
Public Policy Implications---since recession causes undervaluation
and wealth destruction of target banks; they should try to postpone
the possible merger to a favourable period.ImplicationsThanks
NARESH MFM 4th SEMParticularsICICI BankBoM
Net profit after tax(Rs /Cr)105.345.6
Market value of share152.9122.5
Book value58.4205.1
EPS6.438.7
NPA (in %)1.34
CRAR (in %)19.6014.3
DealMarket value beforethe dealSwap ratio based onmarket
priceActual swap ratio
ICICI BankBank of Madura152.9122.5.8012 (2:1)
ParticularsHDFCBankCBoP
Net profit after tax(Rs / Cr)1143.5121.4
Market value of share1474.3056.00
Book value169.28.6
EPS27.80.8
NPA (in %)0.41.3
CRAR (in %)13.111.1
DealMarket value beforethe dealSwap ratio based onmarket
priceActual swap ratio
HDFC BankCenturion Bank ofPunjab1474.956.4.038.034(1:29)
ParticularsICICI BankBoR
Net profit after tax (Rs / Cr)4024.83-102.30
Market value of share901.0082.85
Book value462.1558.04
EPS36.14-6.33
NPA (in %)1.871.6
CRAR (in %)19.407.74
DealMarket value beforethe dealSwap ratio based onmarket
priceActual swap ratio
ICICI BankBank of Rajasthan901.182.25.091.211(1:4.72)