Analysis of ICICI bank and Bank of Rajasthan merger - Free Essay Example

Sample details Pages: 4 Words: 1122 Downloads: 3 Date added: 2017/06/26 Category Finance Essay Type Compare and contrast essay Did you like this example? Analysis of ICICI bank and Bank of Rajasthan merger– Reasons for the deal The promoter group of the Bank of Rajasthan (BoR) had been under immense pressure from regulatory authorities to restructure the Bank due to a variety of problems from 2009 onwards. RBI levied a penalty of INR25 lakhs in February, 2010 for a series of violations including extension of repayment period over permissible limits on intra-day overdraft, irregularities in the accounts of corporate groups, deletion of corporate records from the information systems , irregular property deals, actions against money laundering norms, and poor corporate governance. Further, the RBI nominated 5 directors for the Bank and appointed a new CEO. Don’t waste time! Our writers will create an original "Analysis of ICICI bank and Bank of Rajasthan merger" essay for you Create order Tayal family decided to merge BoR with ICICI Bank due to these regulatory actions. ICICI Bank was also looking for a target to increase their customer base and geographical reach in northern India. Important dates in ICICI Bank- Bank of Rajasthan Merger – Corporate Profile of ICICI Bank ICICI Limited was incorporated in the year 1955 by joint efforts of the Government of India, World Bank and representatives of the Indian Banking Industry’s. However, ICICI Bank was established in 1994. ICICI Bank had around 2000 branches in May 2010. An extensive range of Product and services offered by ICICI though diverse delivery channels are personal banking, corporate banking, retail banking, commercial banking, NRI banking, asset management, investment banking, finance and insurance, mortgages, credit cards. Merger experience: Since 2000, ICICI bank has been using mergers as a strategy to expand its geographical coverage, customer base and to meet regulatory req uirements. Merger with BoR is the 4th acquisition by ICICI Bank. Corporate Profile of Bank of Rajasthan The bank of Rajasthan was established in 1943. In the year ended March 31st, 2010, it had asset base of INR17,300.06 crores and it incurred net loss of Rs. 102.13 crores. The bank had around 463 branches spread across India. It also had 67 onsite and 29 offsite ATMs. The bank provides range of products and services in 3 segments including treasury operations, Banking operations and residuals. Glimpse of the Banks Merger Details Branches of Bank of Rajasthan will function as branches of ICICI Bank. A holder of 118 shares of BOR will be given 25 shares of the combined entity. Existing products of BoR will continue with same charges and features. Customers will get services as per existing procedures of Bank of Rajasthan. 58 branches of a regional rural bank sponsored by BOR will also be transferred to ICICI in addition to the other 468 branches. Negatives – BoR’s non-performing loans are a source of significant risk for the combined entity. As in FY-10 the net worth of BoR was approximately Rs. 760 crore and that of ICICI Bank Rs. 51,700 crore. For December 2009 quarter, BoR reported loss of Rs. 44 crore on an income of Rs.373 crore. Table 1 ICICI Bank offered to pay 188.42 rupees per share, in an all-share deal, for Bank of Rajasthan, a premium of 89 percent to the small lender, valuing the business at $668 million. The BoR approved the deal, which was subject to regulatory agreement. Strategic fit A merger will substantially increase the value of the firm only when there is a proper integration of strategic, financial, economic and organizational aspects. These factors are directly correlated to the performance of the firm after the merger. However, there should be proper strategic fit for a successful integration. Strategic similarity index gives the distance between banks by difference in the k ey strategic variables Table 2 Strategic Variables ICICI Bank (in %) Bank of Rajasthan (in %) Return on loan 12.71 16.30 Liquidity ratio 49.85 48.15 Financial leverage 14.21 5.40 Cost to income ratio (CIR) 87.86 106.86 Efficiency ratio 34.85 38.09 Loan to deposit ratio 89.71 55.31 CRAR 19.41 7.75 NPA 1.88 1.60 Source: Annual reports of the banks, Note: Calculations are based on secondary data Relative size of the target bank is a significant determinant of post-merger performance. A smaller size of BoR compared with ICICI implies easier integration, limited or no overlapping of branches, sharing of technology, etc. BoR’s CIR stands at 106% (including fee expenses) which show that their expenses exceed income. While ICICI Bank’s CIR stood at 87.87 % (including fee expenses). Financial leverage of ICICI Bank is higher than BoR which implies ICICI Bank has higher fixed expence obligations in terms of interest. The net NPA of the target bank is 1.6% against ICICI’s 1.87% but, in Capital Adequacy Ratio, the situation is worse for BoR. ICICI Bank has a strong CRAR of 19.4% against 9% prescribed by RBI and Basel II norms, whereas BoR’s CRAR is 7.74% which may harm the post-merger performance. BoR’s non-interest expenses (efficiency ratio) are more but, their earnings diversity (non- interest income) is better than ICICI Bank which may offs et in effect. The earnings diversification strategy indicates the bank’s exposure to the components of revenue other than interest income. Merger Announcement, Share Price Movements and Shareholding Pattern Changes The deal appears more favourable to BoR since their shareholders gained almost 90% between 07.05.2010 (the start of merger negotiations) and 23.05.2010 (Board Meeting approval). Swap ratio and relevant closing prices of banks Particulars ICICI Bank Bank of Rajasthan Swap ratio 1:4.72 ( 25:118) Price before a day of merger announcement 901.10 82.85 Price on the day of merger announcement 809.20 99.45 Price after a day of merger announcement 824.45 99.45 Source: Economic Times and website of NSE On February 26th, the closing price of BoR’s scrip was 61.8 and on 6th May, it was 84.7. This is the period where the bank faced serious actions from the regulators. During this period, the bank’s scrip value appreciated by 20.9% against the Bank Nifty return of 9.9%. Share price movement of Bank of Rajasthan February 26 to May 6 On May 6th, BoR’s scrip was at 84.7 and ICICI Bank was traded at 902.85. On May 17th, ICICI Bank and BoR recorded a price of 901.1 and 82.25 respectively. It indicates that merger negotiation has a zero effect on the price of merging entities. The Bank Nifty return for the period was 2.7%. Share price movement of BoR and ICICI Bank after the merger announcement (May 17 to June 28) On June 24th, BoR filed the information about the merger to the Bombay Stock Exchange. On May 16th, BoR’s price was 82.85. After the announcement of the merger, it shot up drastically to 99.45, 119.35, 131.30, 144.45, 158.9, and 162.3 on May 17th, 18th, 19th, 20th, 21th and 24th respectively. On the contrary, ICICI’s price reduced from 901.10 to 809.35. During the period, BoR gained about 77%, whereas ICICI lost 1.7% of its value. It is interesting to note that Bank Nifty showed a decline of 4.6 % during this period. Short term wealth creation of BoR can be read in line with the valuation and fixation of swap ratio. The indicative price agreed by both the banks was 188 per share. In the light of the present analysis, it can be concluded that there was not much vulnerability in the prices during the negotiation period. But, after the announcement, BoR’s share price adjusted almost to the price offered by ICICI.