Merger of Centurion Bank of Punjab & HDFC

MERGER OF CENTURION
BANK OF PUNJAB
AND
HDFC BANK
Go for a business that any idiot can run – because

sooner or later, any idiot is probably going to run it...
-Peter Lynch
Businessman and Stock investor
Merger Date : February 25th 2008
Value of the Merger : $ 2.5 billion
The operations of both banks were merged with effect from May 23, 2008.
 It was the largest merger in the private sector banking space in India.
 HDFC Bank was one of the first private-sector banks to get off the ground when
Indian regulators began giving out new private-sector banking licences in the early
1990s.
 Meanwhile, CBoP, a floundering new-generation private bank, was taken over in

2003 by a group of investors spearheaded by Sabre Capital, a fund started by Mr
Talwar, a former Standard Chartered Bank chairman.
 CBoP share holders would get one share of HDFC for 29 shares of CBoP.
Merger between HDFC Bank &

Centurion Bank of Punjab (CBoP)
 Despite the economic crunch worldwide Indian banking houses
had managed to show positive growth
 While banks in the developed economies were on a cost cutting

spree Indian banks were on a growth phase
 Metro licenses were hard to come by for most banks.
Environment
 Incorporated in 1994  Incorporated in 1994
 It was set up by the blue-  Joint Ventures with Century

blooded Housing Finance and Keppel Group
Development Finance
Corporation (HDFC), India's  On 2005 - Bank of Punjab
most reputed mortgage- Merged with Centurion Bank
finance company. to form Centurion Bank of
Punjab
 HDFCs Strategies include :
 2006 Centurion Bank of
◦ Increase market share in India Punjab acquired Lord Krishna
◦ Maintain Low costs Bank
◦ Strong Asset quality
◦ Disciplined Risk Management
◦ High earnings in the low volatile
range.
Company profile..
Strength: Weakness:
 Strongest and most venerable  High dependence on individual

player on Indian mortgages over loans.
the long term.
 Major stake held by American
 Different from its peers financial groups which are under
stress due to economic
 Highly proactive in passing on slowdown.
the cost and benefit to
customers.  Customer service staff needs
training.
 Besides the core business,
HDFC’s insurance, AMC,  Processes and systems, etc need
banking, BPO, and real estate to be better managed
private equity businesses
SWAT Analysis
Opportunity: Threat:
 Fast growing insurance  Loss of market share to

business in the country. commercial banks and HFC’s
 Untapped rural markets.  Higher than expected

increase in funding cost
 Could extend to overseas
broadly  Risk of fraud and NPA
accretion due increasing in
 Fast-track career interest rates and fall in
development opportunities property prices is inherent to
on an industry-wide basis. the mortgage business
 Lack of infrastructure in rural

areas could constrain
investment.
SWAT Analysis
 Cultural fit between the organizations
 The bank had a large nationwide network
 Strong leadership positions in retail segment
 Strong asset quality
 High earning growth
 Both the banks had a strong position in vehicle financing
 Attractive route to supplement HDFC Bank’s organic growth
 7,500 talented employees
Why HDFC Bank chose Centurion

Bank of Punjab
 Horizontal Merger (Both the companies were from same industry)
 Objectives :
◦ Economies of Scale
◦ Wide Line of Products
◦ Dominance in the competitive Banking Industry in India
 The merger was important to face competition from foreign

banks looking to enter the Indian Banking front.
 Both banks had a strong foothold in various sectors like SME &
retail Segments and Retail deposit franchise, vehicle financing,
etc.
 To get more dominance on the market
Nature of the Merger

 CBoP was valued at Rs 9510 crores
 All stock deal (no cash settlement)
 HDFC Bank paid Rs 9510 crores in shares for absorbing CBoP
 Swap ratio was fixed at 1:29 (1 share of Rs.10 each of HDFC

Bank for every 29 shares of Rs.1 each held in CBoP)
 No single lay off of employee.
Deal Size and Structure

Branch in Branch in
BANKS TOTAL ATMs
Metros Non metros
CBoP 127 267 394 452
HDFC Bank 287 467 754 11,088
MERGED 414 734 1148 11540
Number of ATM & Branches Before

and After Merger
 Total branched 1148
 Total ATM’s pan India 11540
 Deposit base was around Rs. 1,200 billion
 Net advances of around Rs. 850 billion.
 The balance sheet size of the combined entity was Rs.

1,500 billion
Position of HDFC Bank after

Merger
 SEBI (substantial Acquisition of shares & Takeovers) Regulations 1997
 Security Contract Regulation Act, 1956 (it prevent undesirable

transactions in securities)
 RBI Mergers & Acquisition Approval
 SEBI Disclosure and Investor Protection Guidelines 2000.
 SEBI(Prohibition of Insider Trading Regulation),1992
 SEBI (Merchant Bankers) Rules/Regulation 1992.
 SEBI (Delisting of Securities )Guidelines,2003
 Companies Act,1956Foreign Exchange Management Act,1999
Regulatory & Legal Frame Work

 Regional strength is one of the benefits that HDFC Bank was looking for,
but the merger also offer several others.
 Organic growth with a merger that added scale, geographical reach and
experienced staff, which are in short supply.
 HDFC Bank has 23,000 employees while CBoP has about 7,500.
 The deal added 394 branches and 452 ATMs to HDFC Bank's existing 754
branches and 1,906 ATMs
 The new entity will have assets of about Rs1.5trillion, the merged entity
will also have a deposit base of around Rs1.2trillion and net advances of
around Rs 850bn.
Benefits of the Merger

 On the day the swap ratio was announced, CBoP shares, which
had run up in anticipation, fell 14.5% to Rs48.25 per share in
adjustment to the ratio.
 HDFC Bank shares fell 3.5% to close at Rs1,422.70 a share,

reflecting investor concerns that CBoP's valuation was too high.
 CBoP's asset quality and resource profile, though healthy, are

slightly weaker than HDFC Bank's own and could impact HDFC
Bank adversely in the short term.
 According to rating agency CRISIL, the benefits of an expanded

branch network and wider geographical coverage will more than
offset any short-term negatives.
Side effects of the Merger

 Other Roadblocks such as:
◦ Technological Issues – Finacle Vs Finware
◦ HR Issues – Mapping of Employees
◦ Operational Issues –Account opening, cheque book issue, net

banking, Recurring Deposits
◦ Infrastructural Issues – Multiplicity of branches, ATMs
◦ Risk Issues – NPA , cost of funds, CASA
◦ Ongoing agitation by unions of public sector banks against

consolidation of SBI
Side effects of the Merger

September SWAP SWA April Value
2007 Ratio Value 2010 appraisal
HDFC 1433 1 1433 1984 38.45%
CBOP 41 29 1189 1984 66.86%
Index 5001 1 5001 5250 4.98%
Gains to Shareholders
 NOPAT and Cost of debt of HDFC bank:
 The cost of debt is showing a continues increase because of the monetary policies of
the Reserve Bank of India
 The NOPAT of the bank was increasing at a higher rate before merger.
Status of the Deal

 The Beta and cost of equity of HDFC bank:
 The 4 years average Beta of HDFC bank before merger was 0.63 which is increase to
0.72 after merger.
 The 4year average cost of equity before merger was 24% which is decreased by
2.14% in past four year after merger (4year average after merger is 21.86%)
Status of the Deal

 Share price of HDFC Bank:
◦ Before merger (jan-2008) Rs. 1600

◦ After merger (May-2013) Rs. 874
◦ Current position (sep-2017) Rs.1741
 Net sales and Net profit chart:
Status of the Deal

Post Merger results are satisfactory but merger is took in Long
term prospective, Following are few more benefits to HDFC
 Access to 394 branches of CBoP and an increased presence in

southern and northern states
 170 of CBoP’s branches lie in the North, concentrated in the

National Capital Region (NCR, 55), Punjab (78), Haryana (28);
150 of its branches are situated in the South, mainly in Kerala
(91).
 Greater access to the North (Punjab and Haryana) as well as the

South (particularly Kerala), thereby strengthening its presence
in those regions.
Conclusion
 CBoP’s strong SME relationships will complement HDFC bias
towards highly rated corporate thus expanding HDFC’s base.
 The creation of India’s 7th largest bank, just behind public

giants like Bank of Baroda, Bank of India.
 Induction of a strong and capable management team with

extensive industry experience and proven capabilities.
 Due to an influx of 394 branches from CBoP, there will be a

significant increase in the number of branches for HDFC.
Conclusion
 The future of the HDFC Bank seems to be good by
looking the performance trend of last four year
Conclusion
 Integrating of IT systems without disrupting customer service
 Mapping of Employees
 Customer communication
 Elimination of redundancies
 Top management vision
 Coordination between different functions
 Structuring of the deal and tax implications
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MERGER OF CENTURION

Go for a business that any idiot can run – because

Value of the Merger : $ 2.5 billion

 Meanwhile, CBoP, a floundering new-generation private bank, was taken over in

Merger between HDFC Bank &

 While banks in the developed economies were on a cost cutting

 Metro licenses were hard to come by for most banks.

 It was set up by the blue-  Joint Ventures with Century

 Strongest and most venerable  High dependence on individual

 Fast growing insurance  Loss of market share to

 Untapped rural markets.  Higher than expected

 Lack of infrastructure in rural

 The bank had a large nationwide network

 Strong leadership positions in retail segment

 Strong asset quality

 High earning growth

 Both the banks had a strong position in vehicle financing

 Attractive route to supplement HDFC Bank’s organic growth

 7,500 talented employees

Why HDFC Bank chose Centurion

 The merger was important to face competition from foreign

 To get more dominance on the market

Nature of the Merger

 All stock deal (no cash settlement)

 HDFC Bank paid Rs 9510 crores in shares for absorbing CBoP

 Swap ratio was fixed at 1:29 (1 share of Rs.10 each of HDFC

 No single lay off of employee.

Deal Size and Structure

CBoP 127 267 394 452

HDFC Bank 287 467 754 11,088

MERGED 414 734 1148 11540

Number of ATM & Branches Before

 Total ATM’s pan India 11540

 Deposit base was around Rs. 1,200 billion

 Net advances of around Rs. 850 billion.

 The balance sheet size of the combined entity was Rs.

Position of HDFC Bank after

 Security Contract Regulation Act, 1956 (it prevent undesirable

 RBI Mergers & Acquisition Approval

 SEBI Disclosure and Investor Protection Guidelines 2000.

 SEBI(Prohibition of Insider Trading Regulation),1992

 SEBI (Merchant Bankers) Rules/Regulation 1992.

 SEBI (Delisting of Securities )Guidelines,2003

 Companies Act,1956Foreign Exchange Management Act,1999

Regulatory & Legal Frame Work

Benefits of the Merger

 HDFC Bank shares fell 3.5% to close at Rs1,422.70 a share,

 CBoP's asset quality and resource profile, though healthy, are

 According to rating agency CRISIL, the benefits of an expanded

Side effects of the Merger

◦ Technological Issues – Finacle Vs Finware

◦ HR Issues – Mapping of Employees

◦ Operational Issues –Account opening, cheque book issue, net

◦ Infrastructural Issues – Multiplicity of branches, ATMs

◦ Risk Issues – NPA , cost of funds, CASA

◦ Ongoing agitation by unions of public sector banks against

Side effects of the Merger

HDFC 1433 1 1433 1984 38.45%

CBOP 41 29 1189 1984 66.86%