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Industry structure: M&A in Indian BankingAshvin Parekh, Partner & National leader – Global Financial Services
3 December 2010
Industry Structure: M&A in Indian BankingPage 2
Regulatory Framework
Banking companies (Acquisition & Transfer of Undertakings) act 1970Section 9 empowers the govt. to make the scheme to carry out the following:
► Capital structure of corresponding new bank► Constitute the board of directors► Reconstitution of a new bank into two or more corporations or amalgamation of any new bank
with any other new bank
Companies Act 1956► Approval of the board of directors of individual companies for the draft proposal► Application in High Court► Approval of shareholders by 75% majority► Sanction by the High Court► Filing of the court order with the Registrar of Companies
RBI – Guidelines for merger/ amalgamation of private sector banks► Decision of merger has to be approved by 2/3rd of the total Board of the respective companies.
Applicable to PSU banks also.Amalgamation between two banking companies
► Approval by shareholders with 2/3 majority► After approval the scheme should be submitted to RBI
Industry Structure: M&A in Indian BankingPage 3
Acquisitions over the last decade
Date of merger Acquirer bank Target bank
Assets of target bank as % of acquiring bank’s assets
Number of branches of target
bank
August 2010 ICICI Bank Bank of Rajasthan 0.05 463
February 2008 HDFC Bank Centurion Bank of Punjab 20 394
August 2007 Centurion Bank of Punjab Lord Krishna Bank 11 110
April 2007 ICICI Bank Sangli Bank 0.5 190
March 2007 Indian Overseas Bank Bharat Overseas Bank 6 102
October 2006 IDBI United Western Bank 8 230
September 2006 Federal Bank Ganesh Bank of Kurundwad 1 32
October 2005 Centurion Bank Bank of Punjab 106 136
August 2004 Oriental Bank of Commerce Global Trust Bank 17 104
February 2003 Punjab National Bank Nedungadi Bank 2 173
March 2001 ICICI Bank Bank of Madura 36 350
February 2000 HDFC Bank Times Bank 75 39
Need to let M&As be business driven within broad regulatory framework
Industry Structure: M&A in Indian BankingPage 4
Global comparison (1/2)
Rank Bank Total Assets ($bn)
1 BNP Paribas 2,965
2 Royal Bank of Scotland Group 2.750
3 Crédit Agricole 2,441
4 HSBC Holdings 2,364
5 Barclays 2,235
6 Bank of America Corp 2,223
7 Deutsche Bank 2,162
8 JP Morgan Chase 2,032
9 Mitsubishi UFJ Financial Group 2,026
10 Citigroup 1,857
68 State Bank of India 279
111 ICICI Bank 103
Source: The Banker – Top 1000 World Banks 2010
Top 200 No. of Banks
USA 27
Japan 18
Germany 15
China 13
Spain 13
India 3
Top 1000 No. of Banks
USA 183
Japan 102
China 84
Germany 72
Spain 41
Switzerland 37
India 31
Industry Structure: M&A in Indian BankingPage 5
Global comparison (1/2)
USA* UK* India
Commercial Banks 6,622 350 232#
Savings institutions 1,138 - -
Branches 98,913 15,000 69,160##
Total loans ($ bn) 7,389 5,953 765**
Total assets ($ bn) 13,383 4,137 1,135
Total deposits ($ bn) 7,738 3,870 1,053**
Population/ branch 3,136 4,156 16,962Source: FDIC (USA), Bank of England, Financial Service Authority, RBI*As on 31 October 2010; **As on 30 September 2010# All scheduled banks (77 SCB, 86 RRBs, 69 Co-operative)## Only SCB branches
► Indian banks lack size with only 1 featuring in the top 100 and 3 in top 200 globally► Two different approaches
► USA large number of banks for large coverage► UK smaller number of banks (153 incorporated in UK, 328 deposit taking)
► Population/ branch very high
Industry Structure: M&A in Indian BankingPage 6
Projected growth over next 5 years
Rs.(’000 crs) USD bn
PSU banks 300-350 65-76
Private banks 125-150 27-32
Foreign banks 42-46 9-10
Total 467-546 101-118
Source: Ernst & Young Research estimates
Estimated Capital Requirement in 2015
► Strong projected economic growth► Banks advances to grow at a CAGR of 20%, to become 2.4 times the
current size by 2015► Estimates do not factor in requirements on account of financial inclusion
thrust
Need for “Mega Banks” to bring in capital and scale
Industry Structure: M&A in Indian BankingPage 7
Industry structure
Industry structure will help alignment of customer segments and services
► M&As essential for creation of Mega banks
► M&As among mid and smaller sized banks will drive efficiency and growth
► Mega banks will be able to support industry in global expansion
► Regulatory framework should allow for inorganic growth especially among private and foreign banks
Mega banks
Medium sized banks
Smaller banks
Industry Structure: M&A in Indian BankingPage 8
M&As in banking – lacking regulatory and legal framework
Public sector► Natural regulatory path not available► Who will initiate the process? Banks themselves or the govt.► Labour/ human resource concern; unions opposed to the move
Private sector► Regulator driven
Foreign banks► Regulatory restrictions
Reforms needed in M&A regulatory structure
Thank you