ANJUMAN

ISLAM’S
ALLANA
INSTITUTE OF
MANAGEMENT
STUDIES

REPORT ON THE
MERGER OF ICICI-BoR

- Prepared by
Mr. Nereus Bridon Barretto
Mr. Abdul Rehman
Mr. Mustak Qureshi
Mr.Imran Shaikh
Ms. Shamiya Shaikh

MMS IIND YEAR

Prof.C S Balasubramaniam

Badruddin Tyabji Marg, PHONE 022 22705207

022 22626028
off. D.N.Road, Fax 022 2270 3419
C.S.T, E-MAIL contact@aiaims.com
Mumbai - 400 001. WEB SITE http://www.aiaims.com
INDIA
 INTRODUCTION

On May 19th, 2010 ,  the Tayal family, which controls Bank of Rajasthan (BoR), has
decided to merge the old private sector bank with the country’s second-largest
lender, ICICI Bank. This would be the third acquisition by ICICI Bank in the last decade.
Both the bank boards have given an inprinciple nod to the merger.The Tayals, who
acquired BoR a decade ago in a messy transaction, are believed to be under pressure to
sell the old private bank amid regulatory action by Sebi and RBI. Mr Padmanabhan was
appointed by RBI, which recently slapped a fine on BoR for a string of violations
including deletion of records in the IT system, shady property deals and irregularities in a
particular corporate group account.

Haribhakti & Sons have been jointly appointed for valuation while ICICI Bank has
appointed Deloitte for the due diligence.

Qutoes :
Ms. Chanda Kocchar :” We have reached an indicative pricing with the promoters on a
swap ratio of 25:118. (A BoR shareholder will receive 25 ICICI shares for every 118
BoR shares held.) This is, however, subject to due diligence. Our understanding of the
strategic value is that it would have taken us three years to build the current account and
savings account relationships. Also, the deal prices the market capitalisation per branch
in the range of around Rs 6.5 crore, which is similar to other old private sector banks.”
On May 24th, 2010, THE boards of ICICI Bank and Bank of Rajasthan (BoR), which met
in Mumbai on Sunday, cleared the merger proposal between the two. Both banks have
called for an extraordinary general meeting of the shareholders on June 21 to approve the
deal. The Tayals, the promoters of BoR, were looking for a valuation of Rs 4,000-5,000
crore when they had started speaking to different banks.

The amalgamation of ICICI-Bor was officially complete on the 12th of August,2010 after
which branches of Bank of Rajasthan Ltd. will function as branches of ICICI Bank Ltd.
with effect from August 13, 2010.

Resources : Economic Times and various other publications, RBI press release
 Banking Sector in India

Indian banks have compared favourably on growth, asset quality and profitability with
other regional banks over the last few years. The banking index has grown at a
compounded annual rate of over 51 per cent since April 2001 as compared to a 27 per
cent growth in the market index for the same period. Policy makers have made some
notable changes in policy and regulation to help strengthen the sector. These changes
include strengthening prudential norms, enhancing the payments system and integrating
regulations between commercial and co-operative banks.

However, the cost of intermediation remains high and bank penetration is limited to only
a few customer segments and geographies. While bank lending has been a significant
driver of GDP growth and employment, periodic instances of the “failure” of some weak
banks have often threatened the stability of the system. Structural weaknesses such as a
fragmented industry structure, restrictions on capital availability and deployment, lack of
institutional support infrastructure, restrictive labour laws, weak corporate governance
and ineffective regulations beyond Scheduled Commercial Banks (SCBs), unless
addressed, could seriously weaken the health of the sector. Further, the inability of bank
managements (with some notable exceptions) to improve capital allocation, increase the
productivity of their service platforms and improve the performance ethic in their
organisations could seriously affect future performance.

Four challenges must be addressed before success can be achieved. First, the market is
seeing discontinuous growth driven by new products and services that include
opportunities in credit cards, consumer finance and wealth management on the
retail side, and in fee-based income and investment banking on the wholesale banking
side. These require new skills in sales & marketing, credit and operations. Second, banks
will no longer enjoy windfall treasury gains that the decade-long secular decline in
interest rates provided. This will expose the weaker banks. Third, with increased interest
in India, competition from foreign banks will only intensify. Fourth, given the
demographic shifts resulting from changes in age profile and household income,
consumers will increasingly demand enhanced institutional capabilities and service levels
from banks.

The interplay between policy and regulatory interventions and management strategies
will determine the performance of Indian banking over the next few years. Legislative
actions will shape the regulatory stance through six key elements: industry structure and
sector consolidation; freedom to deploy capital; regulatory coverage; corporate
governance; labour reforms and human capital development; and support for creating
industry utilities and service bureaus.

Management success will be determined on three fronts: fundamentally upgrading

organisational capability to stay in tune with the changing market; adopting value-
creating M&A as an avenue for growth; and continually innovating to develop new
business models to access untapped opportunities. Through these scenarios, we paint a
picture of the events and outcomes that will be the consequence of the actions of policy
makers and bank managements. These actions will have dramatically different outcomes;
the costs of inaction or insufficient action will be high. Specifically, at one extreme, the
sector could account for over 7.7 per cent of GDP with over Rs.. 7,500 billion in market
cap, while at the other it could account for just 3.3 per cent of GDP with a market cap of
Rs. 2,400 billion. Banking sector intermediation, as measured by total loans as a
percentage of GDP, could grow marginally from its current levels of ~30 per cent to ~45
per cent or grow significantly to over 100 per cent of GDP. In all of this,
the sector could generate employment to the tune of 1.5 million compared to 0.9 million
today.

Availability of capital would be a key factor — the banking sector will require as much
as Rs. 600 billion (US$ 14 billion) in capital to fund growth in advances, non-performing
loan (NPL) write offs and investments in IT and human capital upgradation
to reach the high-performing scenario.Three scenarios can be defined to characterise
these outcomes:

High performance: In this scenario, policy makers intervene only to the extent required
to ensure system stability and protection of consumer interests, leaving managements free
to drive far-reaching changes. Changes in regulations and bank capabilities reduce
intermediation costs leading to increased growth, innovation and productivity. Banking
becomes an even greater driver of GDP growth and employ- ment and large sections of
the population gain access to quality banking products. Management is able to overhaul
bank organisational structures, focus on industry consolidation and transform the banks
into industry shapers. In this scenario we witness consolidation within public sector
banks (PSBs) and within private sector banks. Foreign banks begin to be active in M&A,
buying out some old private and newer private banks. Some M&A activity also begins to
take place between private and public sector banks. As a result, foreign and new private
banks grow at rates of 50 per cent, while PSBs improve their growth rate to 15 per cent.
The share of the private sector banks (including through mergers with PSBs) increases to
35 per cent and that of foreign banks increases to 20 per cent of total sector assets. The
share of banking sector value add in GDP increases to over 7.7 per cent, from current
levels of 2.5 per cent. Funding this dramatic growth will require as much as Rs. 600
billion in capital over the next few years.
Evolution: Policy makers adopt a pro-market stance but are cautious in liberalising the
industry. As a result of this, some constraints still exist. Processes to create highly
efficient organisations have been initiated but most banks are still not best-in-class
operators. Thus, while the sector emerges as an important driver of the economy and
wealth in 2010, it has still not come of age in comparison to developed markets.
Significant changes are still required in policy and regulation and in capability-building
measures, especially by public sector and old private sector banks. In this scenario, M&A
activity is driven primarily by new private banks, which take over some old private banks
and also merge among themselves. As a result, growth of these banks
increases to 35 per cent. Foreign banks also grow faster at 30 per cent due to a relaxation
of some regulations. The share of private sector banks increases to 30 per cent of total
sector assets, from current levels of 18 per cent, while that of foreign banks increases to
over 12 per cent of total assets. The share of banking sector value add to GDP increases
to over 4.7 per cent.

Stagnation: In this scenario, policy makers intervene to set restrictive conditions and
management is unable to execute the changes needed to enhance returns to shareholders
and provide quality products and services to customers. As a result, growth and
productivity levels are low and the banking sector is unable to support a fast-growing
economy. This scenario sees limited consolidation in the sector and most banks remain
sub-scale. New private sector banks continue on their growth trajectory of 25 per cent.
There is a slowdown in PSB and old private sector bank growth. The share of foreign
banks remains at 7 per cent of total assets. Banking sector value add, meanwhile, is only
3.3 per cent of GDP.

Resources : Mckinsey Report 2010

 Pre Merger Scenario

ICICI

ICICI Bank (BSE: 532174, NYSE: IBN) (formerly Industrial Credit and Investment

Corporation of India) is a major banking and financial services organization in India. It
is the second largest bank in India and the largest private sector bank in India by market
capitalization. The bank also has a network of 2,016 branches (as on 31 March 2010) and
about 5,219 ATMs in India and presence in 18 countries, as well as some 24 million
customers (at the end of July 2007). ICICI Bank offers a wide range of banking products
and financial services to corporate and retail customers through a variety of delivery
channels and specialization subsidiaries and affiliates in the areas of investment banking,
life and non-life insurance, venture capital and asset management. (These data are
dynamic.) ICICI Bank is also the largest issuer of credit cards in India. ICICI Bank's
shares are listed on the stock exchanges at BSE, NSE, Kolkata and Vadodara  ;
its ADRs trade on the New York Stock Exchange (NYSE).

 Lower provisions boost bottom line: For Q1FY2011 ICICI Bank has reported a
net profit of Rs1,026 crore, indicating a growth of 16.8% year on year (yoy). The
bottom line, in line with our expectation (Rs1,027 crore), was primarily driven by a
sharp drop in the provisions even as the net interest income (NII) was flattish on a year-
on-year (y-o-y) basis. 
 NII in line: As expected, the NII was flattish at Rs1,991.1 crore, as the advances
book contracted by 6.9% yoy even though it grew by a muted 2% sequentially. The
reported net interest margin (NIM) of 2.5% indicates an expansion of ten basis points
on a y-o-y basis, though the same contracted by ten basis points sequentially.
 Healthy fee income: The non-interest income witnessed a decline of 19.6% yoy
to Rs1,680.5 crore, driven by a sharp drop of 85.4% in the treasury gains that
outweighed the pick-up in the fee income (up 7% yoy). The fee income growth was
driven by the corporate segment as the retail segment continued to see weakness in its
fee revenues due to the bank’s lower focus on the credit card segment.
 Leash on opex: With the ongoing rationalisation of its operations and resources,
the bank managed to lower its operating expenses (opex) further by 4% yoy and by
2.8% sequentially. Notably, despite the ongoing branch expansion the opex declined by
17% even as the staff expenses grew by 23.4% yoy (due to the regularisation of
temporary employees). 
 Though the weak treasury income and flattish NII led to a 13.5% decline in the
operating profit, but the core operating profit (excluding the treasury gains) grew by a
healthy 14.8%. 
 Drop in provisions: During the quarter, provisions declined by 39.7% yoy and by
19.4% quarter on quarter (qoq) to Rs797.8 crore as the slippages came off significantly.
Despite lower provisions, the provisioning coverage improved to 64.8% during the
quarter as the slippages came off sharply.
 Slippages come off sharply: On the asset quality front, the bank saw a 3.7%
sequential increase in its gross non-performing assets (GNPAs) to Rs9,829 crore,
forming 5.14% of the gross advances. Importantly, the gross slippages came off sharply
and stood at Rs350 crore for the quarter (half of the Rs700 crore worth gross slippages
seen in Q4FY2010). 
 Advances up qoq: ICICI Bank’s advances dipped by 7% yoy to Rs184,378 crore,
though the same were up 2.8% qoq driven by improved disbursals in the corporate
segment. Meanwhile, the deposits contracted by 4.4% yoy (and remained flattish qoq)
to Rs200,913 crore during the quarter. Importantly, the current account and savings
account (CASA) ratio improved further to 42.1% from 41.7% in Q4FY2010. 
 Well capitalised: The bank’s capital adequacy ratio (CAR) as on June 30, 2010
was 20.2% (as per Basel II norms) compared with 19.41% at the end of FY2010.
Importantly, the tier-I CAR stood high at 14%, one of the highest among its peers.

Results Rs (cr)
%
Particulars Q1FY2011 Q1FY2010 % qoq
yoy
Net interest income 1991.1 1985.3 0.3 -2.2
Non-interest income 1680.5 2089.9 -19.6 -11.1
  CEB 1413.0 1319.0 7.1 -7.1
  Treasury income 104.0 714.0 -85.4 -46.9
  Net income 3671.6 4075.1 -9.9 -6.5
Operating expenses 1483.5 1546.0 -4.0 -2.8
Staff expenses 575.6 466.5 23.4 -1.2
  Direct marketing expenses 35.8 27.5 30.2 -22.2
  Other operating expenses 872.1 1052.0 -17.1 -2.9
Operating profit 2188.1 2529.1 -13.5 -8.8
Core operating profit (excluding
2084.1 1815.1 14.8 -5.4
treasury)
Provisions & contingencies 797.8 1323.7 -39.7 -19.4
PBT 1390.3 1205.5 15.3 -1.3
Provision for taxes 364.3 327.3 11.3 -9.7
Net profit 1026.0 878.2 16.8 2.0

Bank of Rajasthan

Bank of Rajasthan is a leading private sector Bank, having branches all over India with
prominent presence in Rajasthan having specialised forex and Industrial finance
branches. The Bank operates in three business segments: treasury operations, banking
operations and others/residual. The services provided by the Bank includes commercial
banking, merchant banking, auxiliary services, consumer banking, deposit and money
placement services, trusts and custodial services, international banking, private sector
banking and depository. The other products provided by the Bank includes anywhere
banking, Internet banking, mobile banking, life insurance, general insurance, mutual
funds, depository services, credit cards, international debit cards, foreign remittances,
Western Union money transfer, stamp franking, online shopping and lockers facility. 

PERFORMANCE OF THE BANK DURING 2009-10

FINANCIAL PERFORMANCE

The Bank has posted a net loss( after provisions & taxes) of Rs. 102.13 crores forthe year
2009-10 against a net profit of Rs.117.71 crores for the previous year. Theoperating loss
for the FY 2009-10 amounted to Rs. 27.90 crores as against operating profitof Rs. 193.77
crores for the Financial Year 2008-09. The appropriations for the net losshave been
effected as shown in the performance highlights.

The total income of the Bank remained at Rs.1489.48 crores as compared to an income
ofRs. 1507.23 crores for the previous year.

DEPOSITS

The total deposits of your Bank decreased from a level of Rs. 15187.15 crores to
Rs.15062.35 crores showing a decrease of 0.82%. The Core Deposits (excluding inter
bankdeposits) showed an increase from Rs. 13832.25 crores as on 31st March 09 to Rs.
14204.23crores as on 31st March 10. The Bank continued to lay emphasis on a sustained
growth inretail deposits by expanding client base with a focus on Savings Bank and
Current Account.Saving Deposits, which constitute the core of stable retail liabilities
increased by 25%to Rs 3360.00 crores as against Rs. 2687.99 crores in the previous year.
The cost ofdeposits decreased from 7.10% in the previous financial year to 6.55 % during
the yearunder review due to the general downward movement in interest rates and
increase insavings and current deposits.

ADVANCES

The Bank continued its focus on retail loan products. As a result of this strategy theretail
advances grew to Rs.1014.18 crores which helped in maintaining reasonable yield
andspread. The average yield on advances is 11.68%. Retail Advances constitute 11.95 %
of theBank’s total advances as on 31st March 2010.

The focus on retail also helped the Bank in diversifying the inherent risks in lending.In
corporate advances the Bank continued its policy of targeting selected borrowers ofhigh
credit standing.

The net advances of the Bank during the year under report increased to Rs.8329.47crores
as against Rs. 7780.75 crores in 2008-09.

PRIORITY SECTOR :

In terms of the directives from the Government of India and the Reserve Bank of
India,the Bank is giving utmost importance to lending under Priority Sector and
Agriculture Sector. The Bank’s advances to Priority Sector (inclusive of eligible
investments) as a proportion of Adjusted Net Bank Credit at the end of previous year
stood at 35.31% as on31st March 2010.
INCOME ANALYSIS :

The interest income on advances has decreased from Rs. 917.10 crores in FY 2008-09
toRs. 906.02 crores in FY 2009-10. The total income of the Bank decreased from Rs.
1507.23crores in FY 2008-09 to Rs. 1489.48 crores in FY 2009-10. The percentage of
non interestincome excluding profit on sale of investments to total income for the year
worked out to6.55 .

SEGMENT- WISE PERFORMANCE

The Bank operates in two segments, namely, banking operations and treasury
operationswhich have been recognized as primary segments .As per RBI guidelines, the
Bankingoperations segment has further been bifurcated into three segments i.e.
corporate/wholesale banking, retail banking and Other banking operations. The working
results inrespect of the four segments are as under : (Rs. in crores)

Business Segment For the Year ended 31st For the Year ended 31st
Particular March 10 March 09
Segment Revenue
Treasury Operations 485.60 489.73
Corporate / Wholesale
591.59 564.66
Banking
Retail Banking 392.89 435.43
Other Banking
19.60 17.51
Operations
 Total 1489.68 1507.33

For the Year ended For the Year ended

Business Segment Particular
31st March 10 31st March 09
Less: Inter Segment Revenue
Net Sales/ Income from Operations 1489.68 1507.33
Segment Result
Profit/(Loss) before Tax and Interest
from each Segment
Treasury Operations (15.49) 57.39
Corporate / Wholesale Banking (89.25) 55.71
Retail Banking (59.37) 42.91
Other Banking Operations 19.29 17.18
Total (144.82) 173.19
Add/(less) Other Unallocated Income /
(0.20) (0.10)
(Expenditure) Net Off
Total Profit Before Tax (145.02) 173.09
Capital Employed
Treasury Operations 251.28 323.64
Corporate / Wholesale Banking 215.52 225.75
Retail Banking 74.28 93.71
Other Banking Operations 0.26 0.37
Total 541.34 643.47
Deal Details
 Post Merger Scenario

Bank of Rajasthan (BoR), which has been plagued with regulatory problems off late, has
decided to merge itself with ICICI Bank. The merger will take place via a share swap and
the ratio for the same has been fixed at 25:118 (25 shares of ICICI Bank for 118 shares of
BoR). The boards of both the banks, Bank of Rajasthan and ICICI Bank, have given an
in-principal approval to the amalgamation subject to regulatory approvals.
Valuation of the deal
Based on the share swap ratio of 25:118 (25 shares of ICICI Bank for 118 shares of BoR)
and the closing prices of the two banks as on May 18, 2010, the deal values BoR at a
90% premium to its stock price of Rs99.5 and assigns the bank a total valuation of
Rs3,040 crore. While the deal appears expensive in terms of the premium paid to the
current market price and the book value multiple (~3x FY2009 BV), a comparison of the
market capitalisation per branch reveals that the valuation is largely in line with that of its
peers.

Market cap per branch: a peer comparison

Comparison with bank mergers in the past

Value per
Total value (USD
Acquirer Target branch
mn)
(Rs crore)
HDFC Bank CBOP 2380.0 24.2
Oriental Bank Global Trust Bank 187.0 8.3
ICICI Bank BOR 675.0 6.5
Centurion
Bank of Punjab 81.0 2.6
Bank
ICICI Bank Sangli Bank 67.0 1.6
ICICI Bank Bank of Madura 73.0 1.3

Impact of the deal for ICICI Bank

Expansion of branch network

Bank of Rajasthan has a network of 463 branches. When amalgamated with ICICI Bank,
it will lead to a 23% increase in ICICI’s branch network to around 2,463 branches. The
expansion in branch network bodes well for the bank as it ties in with its expansion plans
and is probably the chief rationale of the merger. With the deal, the bank, which had
made a conscious effort in the recent past to stagnate its balance sheet size as a result of
the asset quality issues, is now re-entering the growth phase. 

Increased presence in the northern region

Bank of Rajasthan has a strong presence in the northern region with 75% of its 463
branches present in north India. After the acquisition of Bank of Madura and Bank of
Sangli, ICICI Bank has a good network of branches in the South and the West. The BoR
merger would help ICICI Bank strengthen its presence in the North.
Bank of Rajasthan: branch distribution (FY2009)

ICICI Bank: branch distribution (FY2009)

Financial impact

The acquisition of BoR will not have a significant impact on ICICI’s balance sheet and
would add around 7.5% to its deposits and 4.3% to its advances. As the balance sheet
impact remains limited, the chief motivation for the amalgamation appears to be the
expansion in branch network, which will grow by 23% post the merger. However, the
deal will prove to be earnings per share (EPS) dilutive for ICICI Bank as the 3.1% equity
dilution coupled with the Rs13.1 crore expected loss for BoR in FY2010 would lead to a
3.3% EPS dilution for the merged entity.

Key financials Rs (cr)

Bank ICICI
Particulars of Rajasthan  Bank Post mergerFY10E % chg
FY10E  FY09   FY10
Profit and loss
Operating
44.5 193.8 9732.2 9776.7 0.5
profit
PAT -13.1 117.7 4025.0 4011.9 -0.3
EPS (Rs) -0.8 7.3 36.1 34.9 -3.3
Balances
Deposits   15187.0 202017.0 217204.0 7.5
CASA ratio 100.0 in
  27.4 42.0 41.0
(%) bps
Advances   7780.0 181206.0 188986.0 4.3
Investments   6809.0 120893.0 127702.0 5.6
Net worth 1032.5 1045.6 51618.0 52650.5 2.0
Shares o/s 16.1 16.1 111.5 114.9 3.1
BVPS 64.0 64.8 463.0 458.2 -1.0
-17.7 in
RoNW (%) -1.0 11.0 7.8 7.6
bps
Concerns

Regulatory concerns
Bank of Rajasthan has been plagued by regulatory concerns relating to the
misrepresentation of the promoters’ stake as well as the violation of norms pertaining to
transactions and the distortion of documents. Reserve Bank of India has levied a fine on
the bank and has also appointed auditors, Deloitte & Haskins, to conduct a special audit
of the bank.

Asset quality concerns

For both BOR as well as ICICI bank there have been concerns relating to the asset
quality. ICICI bank saw its gross non-performing asset (GNPA) rise to 5.1% of the
advances in FY2010, however the bank has made consistent efforts to reduce the same,
the results of which are likely to be seen in the quarters to come. Though the reported
asset quality of BoR seems within control with the GNPA in relative terms (%GNPA) as
on December 31, 2009 at 2.84%, there is a possibility of this number being revised higher
post the due diligence. Any further deterioration of the asset quality for BOR either by
way of an upward revision post the due diligence or by way of higher slippages would be
a cause of concern for ICICI bank.
Outlook

Though the amalgamation is expected to be EPS dilutive for ICICI bank in the near term,
ICICI bank can leverage on Bank of Rajasthan’s network of branches to consolidate its
presence in the northern region as well as aid it in growing its balance sheet just as it
begins to re-enter the growth phase. However, as we lack the complete balance sheet
details of Bank of Rajasthan, we are unable to appropriately estimate the impact of the
merger on the balance sheet of ICICI Bank. Additionally, there is the possibility of a
revision in the numbers for non-performing assets post the due diligence. As a result we
choose to keep our price target under review until further details are revealed. We remain
optimistic on the future prospects of the bank based on the shift in focus towards the
balance sheet growth, the improving operating matrices and the receding asset quality
concerns.

 
Valuation table
Particulars FY2008 FY2009 FY2010E FY2011E FY2012E
Net profit (Rs cr) 4157.7 3758.1 4025.0 5154.8 6770.0
Shares in issue (cr) 111.3 111.3 111.5 111.5 111.5
EPS (Rs) 37.4 33.8 36.1 46.2 60.7
EPS growth (%) 125.5 -9.6 6.9 28.1 31.3
PE (x) 22.0 24.3 22.8 17.8 13.5
P/PPP (x) 11.5 10.3 9.4 9.0 7.9
Book value (Rs/share) 417.5 445.0 462.9 492.0 530.2
P/BV (x) 2.0 1.8 1.8 1.7 1.6
Adjusted BV (Rs/share) 386.2 404.1 429.2 475.4 526.5
P/ABV (x) 2.1 2.0 1.9 1.7 1.6
RONW (%) 10.9 7.8 8.0 9.7 11.9