Consolidation in Indian Banking Industry - The M & A Way

49
Consolidation in Indian Banking Industry - The M & A Way” 0

description

The last decade has seen many positive developments in the Indian banking sector due to the notable efforts of the policy makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and related government and financial sector regulatory entities. However, the small size of Indian banks can be inferred from its low ranks in international league tables. India’s banking industry must strengthen itself significantly if it has to support the modern and vibrant economy. Consolidation alone will give banks the muscle, size and scale to act like world-class banks. We have to think global and act local and seek new markets, new classes of borrowers. " A We School management trainee takes a look.

Transcript of Consolidation in Indian Banking Industry - The M & A Way

Page 1: Consolidation in Indian Banking Industry - The M & A Way

“Consolidation in Indian Banking Industry - The M & A Way”

0

Page 2: Consolidation in Indian Banking Industry - The M & A Way

Executive summary

To: Board Of Directors

From: CEO

Subject: Proposal of Merger of DENA BANK with BANK OF INDIA

Date: 8th September 2010

The last decade has seen many positive developments in the Indian banking sector due to the notable efforts of the policy makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and related government and financial sector regulatory entities. However, the small size of Indian banks can be inferred from its low ranks in international league tables. India’s banking industry must strengthen itself significantly if it has to support the modern and vibrant economy. Consolidation alone will give banks the muscle, size and scale to act like world-class banks. We have to think global and act local and seek new markets, new classes of borrowers. "

We propose to merge Dena Bank with Bank Of India on the grounds of capital, technology, culture, HR practises and financial and operational synergies. Our bank is strong in the corporate credit area with over 50% lending in this segment. On the other hand, the low CASA and hit in Treasury activities during the last financial year have impacted the bottom line. Dena Bank which is strong in western India particularly, Gujarat and Maharashtra, coupled with its healthy CASA ratio, would be a healthy acquisition target.

The method of valuation used for the purpose of merger is the Discounted Cash Flow (DCF) (Income Approach), wherein the future cash flows of the firm are discounted to the present value using the WACC. After valuing, the payment consideration would be in the form of Equity swap ratio, which works out to 1:3.17 i.e. for every 399 shares of Dena Bank, we will give 107 shares of Bank Of India.

Achieving economy of scale in operations is one of the major benefits from this merger. There is great synergy seen as far as the branch network is concerned. This will help our bank to expand further into the rural sector. Since BOI and Dena Bank are on the same technology platform i.e. Finacle by Infosys, integration of the banking operations would take place at a smooth pace thereby making the integration of both the banks constructive. This merger would help BOI reap the benefits of a strong CASA which would also have a positive impact on the NIM and the Cost of Operations. Since Dena Bank is planning to go overseas the merger would provide necessary platform for strengthening our bank’s International presence. In addition to the above, the merger entity will enjoy a stronger capital and asset base.

This deal would also in a way help the government in controlling the fiscal deficit. Post the merger BOI would become stronger than its competitor, Bank of Baroda, in terms of total business, total branches and so on.

1

Page 3: Consolidation in Indian Banking Industry - The M & A Way

Sr. No. Particulars Page No.

1 Consolidation of Indian Banking Industry – The Need 3

2 Economic Outlook 5

3 Industry Overview 6

4 Objectives of the Proposed Merger 7

5 Proposed Merger 8

6 Bank Of India – An Overview 14

7 Dena Bank – An Overview 18

8 Valuation of the Target Bank 21

9 Proposed Method of Payment 26

10 Consolidated Balance Sheet 27

11 Benefits of the Proposed Merger 28

12 RBI Guidelines on Merger and Amalgamation of Banks 32

13 Macro Economic Impact of the Deal 33

14 Conclusion 34

15 Bibliography 35

Index of Contents

2

Page 4: Consolidation in Indian Banking Industry - The M & A Way

Consolidation Of Indian Banking Industry-The Need??

- P. Chidambaram

A strong banking system is critical for sound economic growth so it is natural to improve the comprehensiveness and quality of the banking system to bring efficiency in the performance of the real sectors. One of the ways to achieve this is consolidation i.e the M & A way. Prior to 1999, consolidation was primarily triggered by the weak financials of the bank being merged, whereas in the post 1999 period, there have been mergers between healthy banks driven by business and commercial considerations. The need is to attain meaningful balance sheet size and market share in the face of intensified competition. India needs more intensity. China took the lead 15yrs before India. Assocham has found that size of Indian banks in terms of their assets stands very small to make optimal use of their capacities to raise funds at internationally competitive rates. Combined assets of top ten banks constitute less than 60 per cent of the GDP unlike the banking system of European economies, where even after the global financial turmoil, assets of only top five banks has grown to four times of GDP. The small size of Indian banks is inferred from their low ranks in international league tables. State Bank of India, the largest Indian bank that accounts for nearly a fifth of the domestic market, ranked 76 in (global bank ranking by The Banker 2009) in terms of total assets and 64 in terms of Tier I capital based on its 2009 financials. Indian banks through consolidation could improve their ranking only on the basis of the size of total assets and capital. Even as India is the second largest growth market for banking services after China in terms of the number of wealthy households, the ASSOCHAM Chief said, only two Indian banks, State Bank of India at the 64th position and ICICI Bank Ltd at 81st, figure among the global top 100 by Tier I capital.

Mergers would enable banks to expand their business, which could otherwise be hampered by constraints on raising capital. In the international market, size counts. Also if one wants to be an effective player, one has to have size. Public sector banks are now feeling the crunch. Moreover, organically, a bank may take years to achieve that size, but inorganically it can be done in a much lesser time. Central Government, has favored the merger of public sector banks (PSBs) having a government holding bordering on 51 per cent with those having a much higher state-holding to ensure that their business growth does not suffer due to capital constraints. Merger of public sector banks will enable for using their collective synergy to provide better services.

3

"Consolidation alone will give banks the muscle, size and scale to act like world-class banks. We have to think global and act local and seek new markets, new classes of borrowers. "

Need for Small number of Large banks' to Large number of Small banks’

Page 5: Consolidation in Indian Banking Industry - The M & A Way

Reserve Bank of India's twin-phased roadmap for facilitating entry of foreign banks into India seems to be a step towards fulfilling the key objectives of competition, consolidation and convergence in the sector.

The central government is said to have asked public sector bank chiefs to explore opportunities of M&As among themselves. The government’s objective to seek consolidation among the banks it owns is believed to create a few large, strong banks that could compete with the foreign ones. This move was first mooted by the Narsimham Committee in its first report in 1992 and was also reiterated in its second report in 1999. Due to the fragmented nature of the banking industry, Indian banks are not able to compete globally in terms of fund mobilization, credit disbursal, investment and rendering of financial services.

DO WE NEED CONSOLIDATION?

K V Kamath: “The answer unequivocally is ‘Yes, we need consolidation’. The fifth largest bank in

China probably is bigger than the top five Indian banks put together in terms of assets. It means that the ability of the Chinese banks to do business, whether domestically or globally, is significantly more than any one of our banks. You need engines of finance which can meet the growth aspirations. I think we need to come up with a structure wherein you have banks and other intermediaries which have the ability to marshal large amounts of cash and put on the table a large ticket sized item. Just to put it in context, the State Bank of India is three times the size of Bank of America. The State Bank is probably reaching 90 million to 100 million customers. Bank of America has 30 million customers. On that basis, I am saying that it is three times the size. But if you look at assets, Bank of America has more than a trillion dollars of assets. So it has the muscle. Its ability to cut costs is significantly higher because it is earning that much more. In almost all such comparisons, the scale of assets for foreign banks is 10 times the size for a like-to-like operation. This is a challenge we will face as we go along. We can build the financial size but we are also going to increase the size in terms of the customer base. We already have challenges in terms of branch network, people and technology.

Therefore, while I entirely endorse the proposition that we have to go through consolidation, I would guess that there is simultaneously an issue of sequencing. If we don’t do so, we probably will encounter more problems than solutions. The challenge of the branch network, the people and the technology – all three will have to be sequenced as part of the process of consolidation. Although SBI has 14,000 branches and 100 million customers, it’s very small compared with Citibank which has a market capitalization of $250 billion. Our market cap is $ 7-7.5 billion. Citi has a capital of $67 billion and we have 10 per cent of that. We need to grow a lot more not only domestically but on a

global market plane.”

4

A condition for win-win consolidation is the mindset. If the mindset is not right, not just at the senior management level but throughout the organization, it will not be successful.

Page 6: Consolidation in Indian Banking Industry - The M & A Way

There is a growing consensus amongst policymakers across countries that the world economy is on a rebound after having plummeted into a recession following the financial crisis of 2007-2009. Most economies have started to stabilise and grow after an interruption of nearly 2 years. India has emerged relatively unscathed from the global crisis, growing at 7.2 per cent in 2009-10

(Central Statistical Organisation, advance estimates, February 2010). The recovery was supported by a large fiscal and monetary stimulus. The focus has now shifted to private consumption and investment, which are being viewed as key drivers of growth in 2010-11.

2010-11 RationaleGrowth Agriculture

Industry Services Total

5.58.68.48.0

With private demand expected to pick up in FY11, industrial production growth should remain buoyant. Under the assumption of normal monsoon, agriculture would grow at a rate higher than its trend due to the low base of FY10. The service sector would continue to grow robustly, albeit with marginal slowdown due to a significant reduction in government expenditure reflected in a decline in growth rate of personal and community services.

Inflation WPI-Average

6.5-7.0 Headline inflation is expected to stay elevated at least in the first half of FY11, due to the agricultural price shock, rising commodity prices and recent petrol and diesel price hike. However, in the latter half of the fiscal, the year-on-year inflation is expected to come down due to high base of FY10.

Interest Rate

10 Year G-Sec

8.3-8.5 As growth gains further traction and inflation remains elevated, the RBI would start raising interest rates in FY11. Moreover, the large government borrowing would exert an upward pressure on yields. Additional risk to government borrowings is likely to arise from the expected revenues from disinvestments and 3-G auctions budgeted for FY11 not materializing.

Exchange Rate

Re/US$ 43.5-44.0

Foreign investments are expected to remain robust in FY11, thereby increasing the supply of US$ relative to the demand. This should enable the currency to appreciate.

Fiscal Deficit

As a % of GDP

5.6 The roll-back in tax concessions, as the government gradually withdraws the fiscal stimulus, and the sustained recovery in industry performance, is expected to result in a significant improvement in tax collections during FY11.Also, the combined expected revenues from disinvestment and 3-G auction are expected to further inflate the gross revenues.

Industry Overview

5

Page 7: Consolidation in Indian Banking Industry - The M & A Way

The Indian Banking industry, which is governed by the Banking Regulation Act of India, 1949 can be broadly classified into two major categories, non-scheduled banks and scheduled

banks. Scheduled banks comprise commercial banks and the co-operative banks. In terms of ownership, commercial banks can be further grouped into nationalized banks, the State Bank of India and its group banks, regional rural banks and private sector banks.

The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and resulted in a shift from Class banking to Mass banking. The next wave of

reforms saw the nationalization of 6 more commercial banks in 1980. Since then the number of scheduled commercial banks increased four-fold and the number of bank branches increased eight-fold.

However, several developments in combination have compelled banks to change the old ways of doing business. These include, among others, the deregulation of interest rates {interest rates have been largely deregulated except for: (i) savings deposits, (ii) non-resident Indian (NRI) deposits, (iii) small loans up to Rs 200,000, and (iv) export credit}, technological advancements, pressures arising from a liberalised financial marketplace, increased emphasis on shareholder value, macroeconomic pressures and banking crises in the 1990s.

The business of all SCBs grew at a CAGR of 23.7 per cent between 2003-04 and 2009-10. During the same period, the business of other scheduled commercial banks (OSCBs) (private banks) grew at a CAGR of 24.5 per cent, while nationalised banks showed the highest CAGR amongst all the bank groups at 24.6 per cent. Foreign banks witnessed the lowest growth of 22.3 per cent in terms of advances between 2003-04 and 2009-10, while SBI and associates saw the lowest increase in total deposits at 18.4 per cent during the same period. The share of nationalised banks in the total business has increased slightly to 51 per cent from 50 per cent, since 2003-04.

Banking industry 2010-11

Credit growth expected to revive in 2010-11

Consumers preference to park deposits with PSBs to continue

CASA of PSB’s to get stronger to about 38%

GNPAs forecast to increase as restructured assets turn bad

Deposits to grow around 20 per cent in 2010-11

6

Page 8: Consolidation in Indian Banking Industry - The M & A Way

Objectives of the Proposed Merger

Fundamentally, our merger has the following objectives:

Increased market share- To upgrade regional dominance to national presence. Achieve growth more rapidly by the internal effort

Increased geography - It is a way to increase market penetration in a particular area with the help of an established base

Reduction in expenses – Reduce the fixed cost by removing duplicate departments or operation, lowering the cost of revenue, thus increasing profit margins .i.e. Corporate Synergy by making better use of complimentary resources

We have a very large pool of unskilled labor in the banking system which employs a million people. What we mean by “unskilled” is people that need to be retrained for modern banking. As part of consolidation, what has to happen is the retraining and re-skilling of the work force

Taking on global competition & maintaining growth momentum- The creation of strong public sector banks will also counter the strength of large foreign banks as they enter the Indian market. Merger among strong public sector banks will not only move them towards the top tier of global banks, but also enable them to acquire smaller banks overseas and thus turn into Indian multinational banks.

Accessing new markets i.e International Markets Developing new product and service mixes to satisfy the market demand for additional

products and services like Merchant Banking, Construction Equipment Loan etc. Strengthen the capital base Taking advantage of the awareness that Dena bank is undervalued

7

The growing expectations of the customers are the catalyst for our vision. The customer would continue to be the centre-point of our business strategy. You lose touch with the customer, and you lose everything.

We Aren’t Under-Banked, We Are Under-Served

Page 9: Consolidation in Indian Banking Industry - The M & A Way

PROPOSED MERGER

Basis of Selecting the Target Bank

Capital:

Public Sector banks need to have a minimum of 51% capital from the Government and the rest 49% would be from the public. Thus banks with a high Government holding would have a greater scope to get capital from the public.

Taking into consideration some of the major public sector banks, their Government holding is as follows:

PSB % of Govt. Holding

Canara Bank 73.20

Bank Of India 64.47

SBI 61.43

Punjab National Bank 57.80

Union Bank Of India 55.43

Vijaya Bank 53.87

BOB 53.81

Dena Bank 51.19

8

Our foundation for the merger of the two banks is based on a simple basis that India needs to slowly but surely move from a regime of ‘large number of small banks' to ‘small number of large banks’.

From our point of view, for a healthy merger between two banks the following factors are extremely crucial and need to be considered:

Quality of capital (Tier 1 & 2) Technology Platform Cultural Issues & HR Practices Financial & Operational Synergies

Page 10: Consolidation in Indian Banking Industry - The M & A Way

In case of PSBs with 51%-55% Government holding will find it difficult to get capital from the public and the government may not want to infuse in further capital. Hence merger of two banks would help in enhancing the capital base. At the same time it is very essential to check the Quality of capital. Equity Share Capital and Reserves and Surplus make up Tier 1 capital. Tier 1 capital is also considered to be a good source of capital as it represents the owned funds of the banks and past accumulated profits in the form of reserves. Every banks needs to maintain a minimum 8 percent Tier I Capital to meet the credit requirement of the economy. Whereas Tier 2 Capital which consists of hybrid instruments like Innovative Perpetual Debt Instrument(IPDI), Perpetual Cumulative Preference Shares (PCPS), Subordinated Debts and other borrowings. These are outsiders’ funds and hence are not a part of a bank’s net worth. Also the Tier 2 capital cannot exceed Tier 1.Thus the quality and consistency of the Tier 1 Capital becomes extremely crucial. Tier-1 capital is the core measure of a bank’s financial strength and consists primarily of equity capital and disclosed reserves.

Capital Cycle:

9

The sources of capital for a bank are Government (min51%), public (max49%) and the profits that a bank earns. To increase the profits earned, the bank needs to give more advance for which it needs more deposits and thus it all boils down to the need for more capital. Also the competition in the market makes it difficult to increase the profitability and hence the required capital is not available when needed.

Page 11: Consolidation in Indian Banking Industry - The M & A Way

In case of our proposed merger of BOI and Dena Bank, Dena bank has an Equity Share Capital of Rs.286.82 crores (Tier 1 is 6.76% and Tier 2 is 5.31%) and the Govt. holding is 51.19% whereas Bank Of India has an Equity Share Capital of Rs.525.91 crores (Tier 1 is 8.91% and Tier 2 is 4.10%) and the Govt. holding is 64.47%. In case of BOI, there is a great scope to raise funds from the public and thereby merge with another bank and improve profitability, operations and reach. Whereas for Dena Bank, to expand and grow on its own in this competitive market would be difficult as the capital needed is difficult to obtain, as Govt. holding is just close to 51% and hence raising further funds from the public is not possible unless and until the Government increases its holding substantially. Also it has a very thin margin between its Tier 1 and Tier 2 capital. To increase Tier 2, it will necessarily have to first increase the Tier 1 capital. Dena bank is due to receive equity infusion of Rs 600 crores coming this year in the form of preferential equity. After this, the government’s stake would go up from 51% to 59% .Thus with our proposed merger the combined entity would enjoy a good Tier 1 Capital base of more than 9.5% i.e. above the minimum requirement of 8%.

Technology:

One of the other important factors which play a very important role is that of the technology platform being used by the merging banks. In this case, both BOI and Dena Bank are on Finacle by Infosys. Finacle core banking solution is a comprehensive, integrated yet modular business solution that effectively addresses the strategic and day-to-day challenges faced by banks. It is highly parameterizable providing that much-needed flexibility to innovate and adapt to a dynamic environment. Thus, once the two banks are merged, there would be no need to invest heavily in technology or adjust operations as the technology base is same. The integration phase would be smooth after the merger. This provides a very important functional advantage as far as banks are concerned.

In case of different technology platforms being used, the cost factor would have a major impact especially during the initial years. Thus, the objective of the merger i.e. cost improvisation and optimization would not be served. Also integration of database would be a major problem and may hamper normal operations of both the banks. Thus a common technology platform would help them to go in for further up gradation after integration.

IT spent by banking and financial services industry in USA is approximately 7% of the revenue as against around 1% by Indian Banks. One area where the banking system can reduce the investment costs in technology applications is by sharing of facilities. We are already seeing banks coming together to share ATM Networks. Similarly, in the coming years, we expect to see banks and FIs coming together to share facilities in the area of

10

Page 12: Consolidation in Indian Banking Industry - The M & A Way

payment and settlement, back office processing, data warehousing, etc. While dealing with technology, banks will have to deal with attendant operational risks.

Also today we find that a large number of banks have their own independent technology plans and each one is spending a large amount of money on it. Instead, by coming together and merging, BOI and Dena Bank can spend the same amount of money to serve the purpose and in the process work on further development of technology in their banks.

Bank of India was the first PSU Bank in India to implement TWO-Factor Authentication (2FA) for both Retail and Corporate internet banking customers as an additional security measure. Bank’s customers enjoy the convenience of “secured” Anytime, Anywhere, Anyhow hassle free Banking from the comfort of their homes and offices with a click of a mouse. Thus, such initiatives can now be extended to a bigger population after the merger.

Culture:

The crux of a merger often is in the culture shared by the two firms merging. In case of banks this becomes even more crucial as it is a service industry where culture plays the role of a catalyst. The key to the success of any organization lies in how efficiently the organization manages its’ human resources. It is extremely essential to look at the culture match because at times cultures could become a liability for an organization by creating barriers to change, barriers to diversity or barriers to mergers and acquisitions. In many ways culture will determine the survival of an organization over the long term

The merger of banks in the Indian scenario could be of the following nature:

11

Page 13: Consolidation in Indian Banking Industry - The M & A Way

(Not considering Foreign Banks)

A PSB would be able to share its culture and HR practices best and most effectively with another PSB rather as the culture and working styles are identical. This would thereby create synergies in the working and integration. The working style, pressures and culture of a PSB is quite contrasting as compared to a private sector bank. Not that a Private Bank and PSB wouldn’t succeed, but the former i.e. PSB & PSB would have an upper hand as far as culture and working styles are concerned. A culture is hard to alter, and particularly so in groups that have long standing, because a culture represents the accumulated learning about how to think, feel and perceive the world that has contributed to the durability of the group. In other words, culture is the result of all the daily conversations and negotiations between the members of an organization. They are continually agreeing (sometimes explicitly, usually tacitly) about the ‘proper’ way to do things and how to make meanings about the events of the world around them. Many business commentators are now acknowledging that failure does not have its roots simply in financial, monetary and legal issues but in lack of intercultural synergy. Research suggests that up to 65% of failed mergers and acquisitions are due to 'people issues', i.e. intercultural differences causing communication breakdowns that result in poor productivity.

As a complementary measure, we can incorporate fast track merit and performance based promotion from within to inject dynamism and youthfulness in the workforce. This would help in slowly but steadily turning the Public Sector Working style in the future and make them more competitive.

Synergy:

12

One plus one makes three: This equation is the special alchemy of a merger

Page 14: Consolidation in Indian Banking Industry - The M & A Way

If the resources of one company are capable of merging with the resources of another company effortlessly, resulting in higher productivity in both the units, it is a case of synergy. This is what BOI and Dena Bank would attain after the merger as they have commonalities which would be exploited for improving the profitability and efficiency. Two companies together are more valuable than two separate companies. When BOI and Dena Bank will come together they would gain a greater market share especially in the western part of India and improve its rural presence significantly. The common branches can be shut and the funds can be used for further expansion elsewhere. There would be greater efficiency in case of the NIM and CASA since Dena Bank enjoys a good CASA position as compared to BOI.

Also BOI has an International presence and wan to increase the same further. On the other hand, Dena Bank has International banking facility through Nostro accounts abroad, but does not have any branches in the International market. It wants to open International branches and foray into countries like the UK, Africa, West Asia, and Canada. Thus a common goal will help in achieving synergies on the operational and market front.

Our merger is aimed at exploiting synergies, reducing overlap in operations, right-sizing and redeploying surplus staff either by retraining, labor restructuring or using them in expansion elsewhere. Also Reducing number of banks will largely reduce need of clearing operations where funds could be transferred by bank transfers rather than clearing. Bulk of banking business is in urban areas with many branches of various public sector banks doing negligible business because of too many bank branches in the vicinity. Reducing overheads by merger of public sector banks will increase their profitability

13

Page 15: Consolidation in Indian Banking Industry - The M & A Way

Bank Of India – An Overview

14

Started in 1906 under private ownership and control till July 1969 when it was nationalized along with 13 other banks

3207 branches in India and 29 foreign branches (including five representative offices) CBS & RTGS/NEFT enabled

First Indian Bank to open a branch outside the country, at London, in 1946 First bank among the nationalized banks to establish a fully computerized branch and

ATM facility Founder Member of SWIFT in India Agreement with the Bombay Stock Exchange (BSE) in 1921 to manage the BSE Clearing

House The Government. Of India holds a stake of 64.47%. Base Rate @ 8%

Page 16: Consolidation in Indian Banking Industry - The M & A Way

Major Offerings:

Credit Schemes Deposit Schemes

NRI services Cash management services, DP Services

Safe deposits Credit cards/ATMs

Internet Banking Insurance & Mutual Funds Distribution

Key Financials:

The business mix of the bank includes the deposits and advances, both Indian and Foreign.

15

The overall banks’ business has been showing an increasing trend each year as expansions are on the move. The Global business of the Bank has reached Rs.4 Trillion. The bank has a strong domestic base which is thereby adding a cushion to its foreign operations and helping it expand there. On the foreign foot, the Bank has presence across 4 continents and 18 countries covering all the major financial centers such as London, New York, Paris, Tokyo, Singapore and Hong Kong. BOI is one of the leading Indian banks having International presence.

Page 17: Consolidation in Indian Banking Industry - The M & A Way

16

The bank has a strong growth in the domestic business (80% of the overall business) and the foreign deposits are also improving. The deposits growth of the Scheduled Commercial Banks during 2009-10 slowed down to 17.0 percent during the year as against 19.9 percent during the previous year. However, y-o-y the banks’ deposits have being growing at 26%, thus performing above the industry average. The Bank has a well diversified deposit base with 11.03% of domestic deposits from rural areas, 11.70% from semi urban, 18.60 % from urban and 58.67% from metro areas. The bank’s total clientele base of 35.6 million consisted of 32.9 million depositors and 2.7 million borrowers

The banks’ advances have been growing at an average of 26%y-o-y. Robust sanctions / disbursement by Large Corporate, Mid Corporate, SME and Agriculture enabled the growth. Under Large Corporate, bank added 211 accounts, 15 Corporate Banking Branches, 28 Mid Corporate Branches and 4 domestic overseas branches continue to cater exclusively to the specialized credit requirement of the Corporate borrowers/ exporters this

Bank’s capability to reign in asset quality is due to its large deposit base pan India. The total business grew with a YoY growth of 20% on the back of robust growth in advances and deposits. Both the domestic and foreign segments of the banks are expanding. Credit growth came from corporate, SME and auto loan segments; focus to be on mid corporate segment for higher returns. The pickup in consumption and investment demand and the Government’s thrust on investment in infrastructure sector will provide impetus to the bank credit growth. The deposits growth was seen due to various initiatives to increase the CASA.

On a sequential basis, both operating and net profit have been increasing. In 2010 the Bank’s profit was impacted by drop in Net Interest Margin mainly because of high cost deposits picked up during the earlier part of the year and decline in the yields on advances. The fall in Treasury income due to adverse market conditions and higher NPA provisions also affected the profit level.

Page 18: Consolidation in Indian Banking Industry - The M & A Way

17

Net interest income has been growing significantly but for the current year where it grew only by 4.67%. This is largely on account of banks’ declining CASA. Strong growth in corporate, SME portfolio and auto loans shored up interest income. The cost of funds has declined but didn’t provide pushing up the NII. Also the Non-interest income declined on account of lower treasury gains and reduced recoveries and decline of Core fee income. Thus Lower treasury income hit the other income. Significant MTM losses in an increasing interest rate environment hampered the NII.

With a lower cost of funds this year there was an improvement in margins. The Net Interest Margin dropped also because high cost deposits picked up and there was a decline in the yields on advances.Interest Spread which is the difference of the Yield on Advances and the Cost of Funds declined as the yield on advances performed poorly even though cost of funds reduced. Thus one of the major challenges for the Bank is improving the NIM by keeping the overall of cost of deposits down by expanding CASA base and improving yield on advances by prudent deployment of resources among various portfolios. Also the bank needs to ensure growth in profitability by steady increase in noninterest income keeping in light the pressure on NIM.

Efforts are being made to maximize recovery in written off accounts and uncharged / unrealized interest in NPA accounts which contributes to Bank’s profits significantly. The bank is working on reducing gross NPA level to below 2% (presently 2.85%). It has been stipulated that the Banks are to achieve a minimum NPA provision coverage ratio of 70 percent by end-September 2010. At present the NPA coverage of the bank stands at 65.51%.

Bank has a robust capital base, with a Net worth of Rs.12456 crore and Capital Adequacy Ratio (Basel II) of 12.94 percent at the end of March 2010 which was higher than the regulatory requirement of 10%. The Bank’s Net Worth increased from Rs.11144 crore in March, 2009, i.e. by 11.8 percent. Capitalization remains comfortable with Tier I capital ratio at 8.47%, giving space for balance sheet expansion and additional fundraising.

Page 19: Consolidation in Indian Banking Industry - The M & A Way

18

This year i.e. 2010, with the decline in Non-interest income the Operating Expenses could be covered to the extent of 71.34% as against 98.64% in the previous year. The credit deposit ratio has shown been fluctuating, thereby adding to fluctuating cost to income ratio. Low share of CASA is also a major concern for the bank. However, productivity as measured by per employee business has improved substantially

The bank is effectively using its deposit base to fuel the credit, but is lower as compared to the industry. The credit deposit ratio of the banking system, which remained within the range of 69-70% for majority part of this year, saw upward trend during last quarter of the year and as on 26th March, 2010, the C-D ratio of the banking system stood at 72.22 percent. The overall liquidity in the system remained easy on account of subdued credit growth and healthy deposits growth, with the result, banks had to undertake reverse repo transactions under LAF for the most of the times during the year.

The CASA of the Bank has been declining, but has marginally picked up this year. This is one of the major reasons affecting the banks’ profitability and efficiency. New products are being launched to help improve the CASA business of the Bank. The other PSBs have a CASA in the range of 35-40%.

The Bank has always been at the lead in fulfilling social obligation. The Bank’s lending to Priority Sector on an average has constituted 47 percent of Net Adjusted Bank Credit, which is above the 40 percent norm prescribed by the Reserve Bank of India.

Page 20: Consolidation in Indian Banking Industry - The M & A Way

Dena Bank – An Overview

Major Offerings:

Credit Schemes Deposit Schemes

NRI services Cash management services, DP Services

Credit cards/ATMs Internet Banking

Insurance Mutual Funds Distribution

Key Financials

19

The total business of the Bank has been increasing and is now Rs. 870.66 billion. The growth in aggregate deposits of Commercial Banks was 17% at end-March 2010 and advances grew by 18%, at end-March 2010. However, the Banks’ deposits have been increasing by 21% on an average y-o-y and the advances by 22% on an average y-o-y. The total deposits have reached Rs. 51344 crores during the year, crossing the milestone of Rs. 50000crores for the first time. The business growth this year was driven by advances growth of 22.39% and deposits growth of 19.26%. The advances growth was driven by strong growth in Retail, SME and agriculture.

The Net Profit represents an increase of 20.96% during the year in comparison to an increase of 17.47% during 2008-09. The Net Profit growth was mainly on account of a higher-than-expected improvement in the NIMs and better-than-expected income from recoveries, which boosted the non-interest income of the bank. The operating profit has been rising on account of improved operational efficiency achieved through upgraded IT systems. Lower Costs to Income have also boosted the profits of the bank.

Started in 1938 under the name Devkaran Nanjee Banking Company Ltd. Became Public Ltd. in 1939 and thereafter named Dena Bank Ltd.

Maiden Public Issue of Rs.180 Crores in November 1996

1223 branches in India, CBS enabled. Significant presence in western states, including Maharashtra and Gujarat

The Government. Of India holds a stake of 51.19%. Base Rate @ 8.25%

Page 21: Consolidation in Indian Banking Industry - The M & A Way

20

The overall economic scenario had affected performance of many industries and economic activities during the year and as result, the Gross Non-performing Assets of the Bank marginally increased from Rs. 621 crore to Rs. 642 crores this year. Despite this increase, Gross NPA of the Bank as a per cent of Gross Advances came down from 2.13% to 1.80%. The Provision Coverage Ratio as per revised RBI guidelines stood at 78.61% as at 31st March, 2010, which is much higher than its peers. Continuous efforts were made for up gradation of recently slipped NPAs, recovery in NPAs through compromise settlements, designating officers' at all major centers to augment recovery efforts through negotiated settlements.

The C/D ratio of the bank has been incremental, thereby improving and supporting the NIM movement. Of total loans of the bank, 50% is corporate lending. The business growth this year was driven by advances growth of 22.39% and deposits growth of 19.26%. Thus, it is effectively mobilizing its deposits for lending.

One of the major reasons for the banks increasing NII is its large share of low cost deposits. Proportion of low-cost deposits to total is at 37%, similar to larger peers. The bank plans to increase fee income, which is currently 1% of assets v/s an industry average of 1.5%. The bank has increased focus on 3rd party distribution of mutual funds, and insurance products as well as increase. FX services, which should help boost non-interest income. The Bank’s strategy of concentrating on recoveries in written off accounts, commission income from government business and referral income from distribution of third party products etc. had yielded good results, leading to a growth of 36.85% by way of non interest income.

The CASA of the bank is high just in line with its peers, thereby providing a cushion to its NIM. Increasing Credit/Deposit Ratio is also helping the bank to maintain its NIM at a constant level. The Bank’s benchmark prime lending rate (BPLR) stood at 12.50% which continued at same level throughout the year and thus contain the impact on NIM. Of total loans of DBANK, 50% is corporate lending (low-yielding short-term loans) with SMEs 22% and retail loans 16%. The Bank is now trying to shift its loan mix from corporate towards relatively higher yielding SMEs and retail loans. Also, the Bank will focus very sharply is increase in fee based income through better marketing of bank’s own products that generate fee based income, commission etc. as well as distribution of third party products.

Page 22: Consolidation in Indian Banking Industry - The M & A Way

21

The bank’s CAR has improved consistently and today stands at12.7%, with Tier-I capital of 8.16% (forming 65% of the total CAR). The Gov’t has indicated capital injection of roughly Rs.1300 crores over three years, which would increase its Tier 1 beyond 9.5% and will help sustain better-than-industry growth. For public sector banks, strengthening the capital base was a major issue to support the anticipated asset growth in the medium term. Expected capital injection would increase Tier I capital and support loan growth of 22% pa, above expected industry average of 18% pa.

The bank has reduced its cost-income ratio to 52% in FY09 from 63% in FY05.The reduction was due to increased adoption of technology at 99% of branches and a 3% reduction in employee headcount. The total operating expenses increased by 15.5% y-o-y to Rs221cr, driven by a 10.1% growth in employee costs and a 23.9% growth in other operating expenses. Due to the strong growth in operating income, the cost-to-income ratio of the bank improved.

DBNK’s CASA ratio (the proportion of low-cost deposit to total) is high due to the bank’s strong presence in the developed states of Maharashtra and Gujarat. The bank plans to strengthen CASA through adding new branch (100 licenses received) in the states of Punjab, Haryana and Rajasthan.The high CASA has helped the bank to support its NIM. This year the CASA of the bank improved with the thrust areas for credit expansion being SME, retail and agriculture sectors.

The Bank has been consistently fulfilling its social obligations in respect of priority sector lending. The Bank had adopted multi pronged strategies during the year, to augment credit flow to various segments of Priority Sector Advances. Priority Sector Advances of the Bank have thus increased from the level of Rs. 9715 crores as of March, 2009 to Rs. 11718 crores as on March, 2010 registering a growth of 20.62% over previous year. The ratio of priority sector advances to Adjusted Net Bank Credit stood at 40.15% as of March, 2010 against the regulatory guidelines of 40%.Out of the total borrower accounts about 80% borrowers have been benefited under the category of Priority Sectors.

Page 23: Consolidation in Indian Banking Industry - The M & A Way

Valuation of the Target Bank

Every asset, financial as well as real, has a value. The value of an asset comes from its capacity to generate cash flows i.e. its future income. The method of valuation used in this case is the Discounted Cash Flow (DCF) method (Income Approach). DCF valuation is based upon expected future cash flows and discount rates. We have projected the earning capacity of the assets over a period of time and thus discounted these future earnings to a current value at the Weighted Average Cost of Capital (WACC). We have discounted the projected earnings for a period of three years i.e from FY 2011-2013 at the respective WACC and thereafter we have assumed the firm to grow perpetually at a constant rate of 5%, based on the understanding of the growth of the banking industry as a whole.

22

Assumptions made in our Valuation:

The firm would continue till perpetuity

The Deposits to grow at 16% y-o-y

The Advances to grow at 17% y-o-y and 2013 onwards at 16% y-o-y

The Equity infusion of Rs 600 crores in FY2011 in the form of Preferential Equity from the GOI to Dena Bank. Further infusion of Rs.700 crores in the following years not considered. Cost of this capital is linked to the repo rate of 6.5%,as per the indications of the management

The growth in the other items of Balance Sheet and Income Statement is based on the past trends and expected industry growth

Banking Industry to grow at 5% FY2014 onwards

Risk Free Return at 6.54% i.e the 364 day T-Bill rate

The Cost of Equity is calculated as per the CAPM model and the Cost of Debt is considered after the Tax Shield Effect

The Average Market Return is taken at 20%

While preparing the consolidated accounts, we have assumed zero interbank transactions between Dena Bank and Bank Of India

The Due-Diligence report is positive to the merger

Page 24: Consolidation in Indian Banking Industry - The M & A Way

Projection - Bank Of India

FY10 FY11 (E) FY12 (E) FY13 (E) FY14 (E)IncomeInterest Earned 17,877.99 22,347.49 27,934.36 34,917.95 43,647.44Other Income 2,616.64 2,514.90 3,368.60 4,054.10 4,864.92Total Income 20,494.63 24,862.39 31,302.96 38,972.05 48,512.36ExpenditureInterest expended 12,122.04 15,152.55 18,940.69 23,675.86 29,594.82Employee Cost 2,296.07 2,636.25 3,031.68 3,486.43 4,009.40Selling and Admin Expenses 612.76 674.88 776.11 892.53 1,026.41Depreciation 101.29 147.63 169.77 195.24 224.53Miscellaneous Expenses 657.70 759.24 873.12 1,004.09 1,154.71Operating Expenses 3,667.82 4,217.99 4,850.69 5,578.30 6,415.04Provisions/Contingencies 2,963.70 3,852.81 5,008.65 6,511.25 8,464.62Total Expenses 18,753.56 23,223.35 28,800.03 35,765.40 44,474.49

Net Profit for the Year 1,741.07 1,639.03 2,502.93 3,206.65 4,037.87Extraordionary Items 0.00 0.00 0.00 0.00 0.00Profit brought forward 0.00 0.00 0.00 0.00 0.00Total 1,741.07 1,639.03 2,502.93 3,206.65 4,037.87Preference Dividend 0.00 0.00 0.00 0.00 0.00Equity Dividend 428.65 327.81 500.59 641.33 807.57Earning Per Share (Rs) 33.11 31.17 47.59 60.97 76.78Total 1,312.42 1,311.23 2,002.34 2,565.32 3,230.29

Bank Of India-Income Statement(In Rs. Cr)

FY10 FY11 (E) FY12 (E) FY13 (E) FY14 (E)Capital and Liabilities:Equity Share Capital 525.91 525.91 525.91 525.91 525.91Preference Share Capital 0.00 0.00 0.00 0.00 0.00Total Reserves 13,704.08 15,015.31 17,017.65 19,582.97 22,813.26Net Worth 14,229.99 15,541.22 17,543.56 20,108.88 23,339.17Deposits 229,761.94 280,309.57 341,977.67 424,052.31 525,824.87Borrowings 22,399.90 14,079.50 14,579.50 15,079.50 15,833.48Total Debt 252,161.84 294,389.07 356,557.17 439,131.81 541,658.34Other Liabilities & Prov. 8,574.63 10,349.00 12,418.80 14,902.56 17,883.07Total Liabilities 274,966.46 320,279.28 386,519.53 474,143.25 582,880.58

Assets

Cash & Balances with RBI 15,602.62 17,943.01 20,634.46 23,729.63 27,289.08Balance with Banks 15,627.51 10,143.63 15,251.37 21,826.47 31,018.48Advances 168,490.71 205,558.67 250,781.57 313,476.97 391,846.21Investments 67,080.18 77,142.21 88,713.54 102,020.57 117,323.65Net Block 2,286.74 2,515.41 2,766.96 3,043.65 3,348.02Capital Work In Progress 65.07 0.00 0.00 0.00 0.00Other Assets 5,813.63 6,976.36 8,371.63 10,045.95 12,055.14Total Assets 274,966.46 320,279.28 386,519.53 474,143.25 582,880.58

Bank Of India-Balance Sheet(In Rs. Cr)

23

Page 25: Consolidation in Indian Banking Industry - The M & A Way

Projection – Dena Bank

FY10 FY11 (E) FY12 (E) FY13 (E) FY14 (E)IncomeInterest Earned 4,010.36 4,720.19 5,399.90 6,263.89 7,266.11Other Income 588.63 535.00 567.00 609.53 655.24Total Income 4,598.99 5,255.19 5,966.90 6,873.41 7,921.35ExpenditureInterest expended 2,910.33 3,425.46 3,918.72 4,545.72 5,273.04Employee Cost 511.59 550.15 613.03 673.11 739.07Selling and Admin Expenses 199.27 229.23 255.43 280.46 307.95Depreciation 27.61 27.51 30.65 33.66 36.95Miscellaneous Expenses 109.61 110.03 122.61 134.62 147.81Operating Expenses 848.08 916.91 1,021.72 1,121.85 1,231.79Provisions/Contingencies 329.32 356.58 397.34 436.28 479.03Total Expenses 4,087.73 4,698.94 5,337.78 6,103.85 6,983.86

Net Profit for the Year 511.26 556.25 629.12 769.57 937.49Extraordionary Items 0.00 0.00 0.00 0.00 0.00Profit brought forward 0.00 0.00 0.00 0.00 0.00Total 511.25 556.25 629.12 769.57 937.49Preference Dividend 0.00 39.00 39.00 39.00 39.00Equity Dividend 67.11 61.19 69.20 84.65 103.12Corporate Dividend Tax 0.00 0.00 0.00 0.00 0.00Earning Per Share (Rs) 17.83 19.39 21.93 26.83 32.69Total 444.15 456.06 520.92 645.91 795.37

Dena Bank-Income Statement(In Rs. Cr)

FY10 FY11 (E) FY12 (E) FY13 (E) FY14 (E)Capital and Liabilities:Equity Share Capital 286.82 286.82 286.82 286.82 286.82Preference Share Capital 0.00 600.00 600.00 600.00 600.00Reserves 2,314.87 2,770.93 3,291.85 3,937.76 4,733.13Net Worth 2,601.69 3,657.75 4,178.67 4,824.58 5,619.95Deposits 51,344.28 59,559.36 69,088.86 80,143.08 92,965.97Borrowings 1,561.92 1,640.00 1,722.00 1,808.10 1,898.51Total Debt 52,906.20 61,199.36 70,810.86 81,951.18 94,864.48Other Liabilities & Prov. 2,078.70 2,391.00 2,749.00 2,886.45 3,030.77Total Liabilities 57,586.59 67,248.12 77,738.53 89,662.21 103,515.20

AssetsCash & Balances with RBI 4,355.03 5,003.00 6,287.00 7,561.37 9,094.07Balance with Banks 759.49 2,068.13 1,348.17 1,503.30 1,735.87Advances 35,462.45 41,491.07 48,544.55 56,311.68 65,321.54Investments 15,694.23 17,272.00 20,036.00 22,644.69 25,593.03Net Block 407.28 415.00 424.00 432.48 441.13Other Assets 908.11 998.92 1,098.81 1,208.69 1,329.56Total 57,586.59 67,248.12 77,738.53 89,662.21 103,515.20

Dena Bank -Balance Sheet(In Rs. Cr)

24

Page 26: Consolidation in Indian Banking Industry - The M & A Way

Valuation-Bank Of India

Free Cash Flow FY10 FY11 (E) FY12 (E) FY13 (E) FY14 (E)

PAT 1,741.07 1,639.03 2,502.93 3,206.65 4,037.87Deposits 40,053.46 50,547.63 61,668.10 82,074.64 101,772.56Other Liabilities & Provisions 1,949.44 1,774.37 2,069.80 2,483.76 2,980.51Total 43,743.97 53,961.03 66,240.83 87,765.05 108,790.94Cash & Balances with RBI 6,687.34 2,340.39 2,691.45 3,095.17 3,559.45Balance with Banks 2,781.54 -5,483.88 5,107.74 6,575.10 9,192.01Advances 25,581.34 37,067.96 45,222.91 62,695.39 78,369.24Net Block -134.74 228.67 251.54 276.70 304.37Other Assets 121.59 1,162.73 1,395.27 1,674.33 2,009.19Total 35,037.07 35,315.87 54,668.92 74,316.69 93,434.25

FCFF 8,706.90 18,645.16 11,571.92 13,448.36 15,356.68

Bank of India-Valuation (In Rs. Cr.)

WACC:

DCF Calculation:

25

Cost of Equity FY10Risk Free Return 6.54Beta 0.90Average Market Return 20.00Cost of Equity 18.65

Cost of Debt FY10Interest Rate 5.85Tax Rate 0.30Cost of Debt 4.10

WACC FY10 FY11 (E) FY12 (E) FY13 (E) FY14 (E)Equity 14,229.99 15,541.22 17,543.56 20,108.88 23,339.17Debt 22,399.90 14,079.50 14,579.50 15,079.50 15,833.48Total 44,799.80 28,159.00 29,159.00 30,159.00 31,666.95WACC 7.97 12.34 13.27 14.49 15.80

DCF-Rs. In Cr. FY11 (E) FY12 (E) FY13 (E) FY14 (E)16,596.69 9,019.27 8,962.37 142,248.95

94,798.72

Valuation of the Firm Rs. In Cr.Total Value of the Firm 129,377.06Less: Debt 22,399.90Value for Equity Shareholders 106,977.16No. of Outstanding Shares 52.59Price per Share (in Rs.) 2,034.17

Equity Swap RatioPrice per Share of BOI 2,034.17Price per Share of DB 642.58Swap Ratio 3.17

DCF as on 2010

16596+9019 +8962+94798

=129, 377.06

Page 27: Consolidation in Indian Banking Industry - The M & A Way

Valuation-Dena Bank

WACC:

DCF Calculation:

26

Free Cash Flow FY10 FY11 (E) FY12 (E) FY13 (E) FY14 (E)

PAT 511.26 556.25 629.12 769.57 937.49Deposits 8,293.67 8,215.08 9,529.50 11,054.22 12,822.89Other Liabilities & Provisions -1,108.57 312.30 358.00 137.45 144.32Total 7,696.36 9,083.64 10,516.62 11,961.23 13,904.71Cash & Balances with RBI -627.38 647.97 1,284.00 1,274.37 1,532.69Balance with Banks -115.22 1,308.64 -719.96 155.13 232.57Advances 6,584.49 6,028.62 7,053.48 7,767.13 9,009.87Net Block 2.12 7.72 9.00 8.48 8.65Other Assets 60.92 90.81 99.89 109.88 120.87Total 5,904.93 8,083.76 7,726.41 9,314.99 10,904.65

FCFF 1,791.43 999.88 2,790.20 2,646.24 3,000.06

Dena Bank-Valuation (In Rs. Cr.)

Cost of Debt FY10Interest Rate 9.52Tax Rate 0.30Cost of Debt 6.66

Cost of Equity FY10Risk Free Return 6.54Beta 1.19Average Market Return 20.00Cost of Equity 22.56

Cost of Preference FY10Rate of Dividend 6.50Cost of Preference 6.50

WACC FY10 FY11 (E) FY12 (E) FY13 (E) FY14 (E)Equity 2,601.69 3,057.75 3,578.67 4,224.58 5,019.95Preference 0.00 600.00 600.00 600.00 600.00Debt 1,561.92 1,640.00 1,722.00 1,808.10 1,898.51Total 4,163.61 5,297.75 5,900.67 6,632.68 7,518.45WACC 16.60 15.82 16.29 16.77 17.26

DCF-Rs.In Cr. FY10 FY11 (E) FY12 (E) FY13 (E) FY14 (E)863.31 2,063.36 1,661.91 24,464.16

15,364.12

Cost of Debt FY10Interest Rate 9.52Tax Rate 0.30Cost of Debt 6.66

Cost of Preference FY10Rate of Dividend 6.50Cost of Preference 6.50

Valuation of the Firm Rs. In Cr.

Total Value of the Firm 19,952.69Less: Debt 1,561.92Value for Equity Shareholders 18,390.77No. of Outstanding Shares 28.62Price per Share (in Rs.) 642.58

DCF as on 2010

863+2063 +1661+15364

=15364.69

Page 28: Consolidation in Indian Banking Industry - The M & A Way

Proposed Method of Payment

The mode of payment, in case of merger of BOI and DB, will be done by determining the Equity Swap ratio. The Equity Swap ratio is essentially the rate at which the two merging companies will exchange their shares. A share for every share exchange is often the method used in mergers involving large companies. The shareholder merely exchanges his shares in one company for shares in the other company.

After valuing both the banks, the share value for DB comes to Rs. 642.58 and for BOI, it is Rs. 2,034.17. This works out for a Swap ratio of 1: 3.17, which means for every 339 shares of DB, BOI will give 107 shares. This will value the deal at about Rs. 18,390.77 crores. As the Government owns 51.19% of DB's paid-up capital, it will get Rs. 35,926.49 crores.

Post Merger, Consolidated Balance Sheet

Since the Mode of Payment in the merger is in the form of Equity Swap ratio of 1:3.17, our Bank will have to issue fresh equity shares of around Rs. 90.48 crores.

Also, it is assumed that, the equity infusion by Government of Rs. 600 crores, in the form of preference shares, in Dena Bank, will now be infused in the merged entity.

The above two parameters would help our bank in increasing the government holding in the merged entity, ultimately leading to healthier Tier-1 Capital.

The total business of BOI will cross Rs 5.87 lakh crores (Rs 5.87 trillion) after its takeover of the Dena Bank, thereby giving BOI a competitive edge over its competitors

The difference in the value of the assets being taken over and the consideration paid would be offset by increase in the reserves, which is more than what would have been, if were to just combine both the entity’s reserves. This indicates that the deal is beneficial to our bank.

27

Page 29: Consolidation in Indian Banking Industry - The M & A Way

Consolidated Balance Sheet

28

FY11 (E) FY12 (E) FY13 (E) FY14 (E)

Capital and Liabilities

Equity Share Capital 525.91 525.91 525.91 525.91

New Issued Share Capital 90.48 90.48 90.48 90.48

Preference Share Capital 600.00 600.00 600.00 600.00

Total Reserves 17,982.58 28,303.77 40,085.52 52,538.02

Net Worth 18,673.06 28,994.25 40,776.00 53,754.41

Deposits 339,868.93 483,728.96 670,292.41 910,722.72

Borrowings 15,719.50 15,801.50 15,887.60 15,978.01

Total Debt 355,588.43 499,530.46 686,180.01 926,700.72

Other Liabilities & Provisions 12,740.00 13,098.00 13,235.45 13,379.77

Total Liabilities 387,527.40 542,148.62 740,717.37 993,834.91

Assets

Cash & Balances with RBI 22,946.01 32,674.91 45,137.53 61,002.22

Balance with Banks 12,211.76 16,599.54 23,329.77 32,754.35

Advances 247,049.73 349,945.22 483,244.85 654,880.26

Investments 94,414.21 128,612.34 170,548.88 221,724.23

Net Block 2,930.41 3,647.46 4,444.68 5,330.28

Other Assets 7,975.28 10,669.15 14,011.67 18,143.57

Total Assets 387,527.40 542,148.62 740,717.37 993,834.91

Consolidated Balance Sheet of Bank Of India-Post Merger (Rs.In Cr.)

Page 30: Consolidation in Indian Banking Industry - The M & A Way

Branch Network Advantage: Increased Geography & Customer Base

Achieving economy of scale in operations is one of the major benefits from this merger. BOI has operations and branches spread across India and is stronger in the Western Region. Dena Bank also, is strong in the western part of India i.e Maharashtra and Gujarat (80%). Thus, BOI can thereby take advantage of this and cut down common branches there and use the funds thereby released to open branches in the other parts of the Country. Accordingly the branch network of BOI would also increase in the inorganic way, thereby reducing capital expenditure. BOI would thus have a spread of over 4000 branches and 1200 ATMs.

Rural Reach:

There is a great synergy seen as far as the branch network is concerned. Both have major presence in the Rural Areas. Thus, BOI will be able to penetrate further into the rural sector. One of the goals of BOI as found out is to increase the flow of credit to Micro sector borrowers. This objective would be achieved in a better way through this merger by strengthening its rural presence. Also Dena Bank wants to cover 1,000 villages over the next few years as part of its financial inclusion program. So both Dena and BOI have a common goal here. The cost factor would have a great impact as both banks can now strategically expand its branches in the rural areas.

Bank Of India Dena BankLead Bank Lead Bank responsibility in 48 Lead Bank responsibility in 13

29

Page 31: Consolidation in Indian Banking Industry - The M & A Way

Responsibility districts spread over Five states viz. Jharkhand (15), Maharashtra (12), Madhya Pradesh (12), Uttar Pradesh (7) and Orissa (2)

districts spread over Three states viz. Gujarat(7), Chhattisgarh(5) & Dadra & Nagar Haveli(1)

Regional Rural Bank

The Bank has sponsored Five RRBs (after consolidating from original 16 RRBs) operating in five States

These RRBs are operating in 46 districts with a network of 1018 branches

Total profit of Rs.143.07crore of all five RRBs for FY 09-10

The total business mix of these RRBs stood at Rs.13245.55 crores for FY 09-10

The Bank has sponsored Two RRBs operating in the States of Gujarat and Chhattisgarh

These RRBs have a network of 249 branches spread over 10 districts

Total profit of Rs. 24.16 crores of both the RRBs for FY 09-10

The total business mix of these RRBs stood at Rs.3416.87 crores for FY 09-10

Thus when the above Lead banks and RRB are looked into the map, it would give us a clear picture:

Thus by merging, BOI would enjoy Lead bank responsibility and RRBs concentration in the Central States, thereby giving further opportunities to expand north or south in the future.

Technology:

Since BOI and Dena Bank are on the same technology platform i.e. Finacle by Infosys, integration of the banking operations would take place at a smooth pace thereby making the integration of both the banks constructive. There wouldn’t be a need for heavy spending to integrate both as far as technology integration is concerned since their platform is the same. Instead of spending money on independent technology plans, both BOI and Dena Bank can spend the same amount of money and serve the purpose. The additional funds can be used for expansion or further technological up gradation.

CASA:

30

Page 32: Consolidation in Indian Banking Industry - The M & A Way

The CASA ratio i.e. the proportion of low-cost deposit to total is high for Dena Bank (has been in the range of 35%-45%) due to its strong presence in the developed states of Maharashtra and Gujarat. It also has a good presence in the rural counterparts which helps it to tap the low cost deposits. In case of BOI, 9% of the Advances and 11% of the deposits are from the rural areas. The corporate lending of BOI is strong at 53%. Dena Bank also has a strong presence in the corporate credit market (35%).

These commonalities will help in improving the CASA. In case of BOI the CASA (has been in the range of 30%-40%), is a major concern. It is very low as compared to its peers and also lower than Dena Bank. Thus, the merger would help BOI reap the benefits of a strong CASA which would also have a positive impact on the NIM and the Cost of Operations.

International Presence:

The International business of BOI constitutes 17.28% of total business and it has 3236 branches including 29 branches/offices overseas. Dena Bank maintains 19 Nostro accounts abroad in nine major currenciesto cater to the business need of our Customers. It wants to open branches in the International markets like UK, Africa, Asia, US and Canada.

31

Bank Of India-International

Page 33: Consolidation in Indian Banking Industry - The M & A Way

Thus, the merger would help in further International Expansion and make its presence felt at a global level. BOI also acts as a Mandated Lead Arranger (MLA) and Joint Book Runner (JBR) for Multicurrency International Syndication loans and arranged loan in USD, JPY, EURO and GBP currencies for Indian Corporates for their expansion / acquisition and Joint Ventures. BOI can use Dena’s customer base for this purpose also.Dena Bank and BOI both are Authorized Dealers (members of FEDAI). BOI can thereby achieve operational efficiencies on this front as well by using the existing Dena Bank AD network (34 branches) across the country.

Capital:

The most important need of a bank is the Capital. Tier-1 capital is the core measure of a bank’s financial strength and consists primarily of equity capital and disclosed reserves. By merging, BOI will enjoy a wider capital base. Also Dena bank is due to receive equity infusion of Rs 1,300 crores from the government over the 3 years. After this, the government’s stake would go up which would make it easy for the bank to raise capital from markets on its own. This capital infusion would improve Dena Bank’s tier-1 capital to more than 9.5%. This additional capital would help BOI to expand.

Foreign Currency loans:

Indian banks have a huge deposit base in INR and so it is able to offer rupee loans at lower rates as compared to foreign banks. However, foreign currency loans are cheaper when availed from the Foreign Banks. The foreign banks have huge deposit base overseas and hence they are able to offer foreign currency loans at a lower rate (LIBOR+ Spread) as compared to Indian Banks i.e. their spread is lower and competitive. BOI already has an International base. With the merger, it can now concentrate more on the International front as far as branch network is concerned to increase its deposits there and thus offer competitive rates for foreign currency loans. Domestic branch network would be increased inorganically through the merger.

Fund Raising Capacity:

After the merger, the increase in the assets base will improve the fund raising capacity of BOI. The total assets of BOI would increase and thereby its capacity to raise funds would increase by 20% due to an increase in asset base. (Individual v/s Merger)

32

Page 34: Consolidation in Indian Banking Industry - The M & A Way

NPA:

For BOI, the NPA management of Dena Bank wouldn’t be a major issue as it already has 78% NPA Provision Coverage, whereas BOI has 65% NPA Provision coverage. In case of Dena Bank, the Gross NPAs as a percentage of the Gross Advances have significantly reduced from 6.44% in FY2006 to 1.81% in FY2010 and the Net NPAs to Net Advances have also reduced from 3.04% in FY2006 to 1.21% in FY 2010. On the other hand, BOI has higher NPAs as a percentage of its advances. BOI aims at reducing gross NPA level to below 2% (presently 2.85%). Thus NPA Management would be synergistic after the merger.

RBI Guidelines on Merger and Amalgamation of Banks

The regulatory framework for M&As in the banking sector is laid down in the Banking Regulation (BR) Act, 1949. Following are some of the important guidelines.

Amalgamation should be approved by two-thirds of the total strength of the total members of Board of Directors of each of the two banking companies.

The swap ratio should be determined by independent valuers having required competence and experience. The Board should indicate whether such swap ratio is fair and proper.

The value to be paid by the respective banking company to the dissenting shareholders in respect of the shares held by them is to be determined by RBI.

The shareholding pattern and composition of the board of the amalgamating banking company after the amalgamation are to be in conformity with the Reserve Bank’s guidelines.

Where an NBFC is proposed to be amalgamated into a banking company in terms of Sections 391 to 394 of the Companies Act, 1956, the banking company is required to obtain the approval of RBI before the scheme of amalgamation is submitted to the High Court for approval.

33

Page 35: Consolidation in Indian Banking Industry - The M & A Way

Macro Economic Impact of the Deal

If you look at the international context, size is increasingly the trend. As net interest margins get thinner, the need for more sophisticated products and low-cost technology will be felt. If you look at the total banking market in India, excluding rural and cooperative banks, there are nearly 100 banks. Depending on the government’s view on how quickly the public sector banks can have private shareholders of any reasonable influence, probably two or three in the public sector, two or three private banks and two or three foreign banks will emerge as big banks.

34

The Disinvestment target for the Government of India for FY11 is 40000 crores. Through the merger, the Government will receive Rs. 9413.84 crores, which in a way would help it to attain its target

A step towards reducing the Fiscal Deficit Assocham has found that size of Indian banks in terms of their assets stands very

small to make optimal use of their capacities to raise funds at internationally competitive rates. Combined assets of top ten banks constitute less than 60 per cent of the GDP unlike the banking system of European economies, where even after the global financial turmoil, assets of only top five banks has grown to four times of GDP. The merger of BOI with Dena Bank would be a small step in this direction, wherein the combined asset base of the merged entity, would make the bank more internationally competitive

The Govt. has decided to provide funding close to Rs. 15000 crores over a period of 3-4 years to improve the capital quality of the PSBs in India as a lot of the subordinate debt and other hybrid instruments are considered by a major PSBs under the Tier 1 Capital itself. The merger would help in better mobilization and healthier deployment of the capital

Page 36: Consolidation in Indian Banking Industry - The M & A Way

Conclusion

Comparison Table between the Leading Public Sector Banks

Particulars Bank of India

(post merger)

Bank of Baroda State Bank of India

Branches 4,430 3,148 12,496

ATM’s 1,216 1,315 16,369

Employees (approx) 50,201 38,071 2,00,299

Deposits (Rs. Crores) 3,39,868.93 2,94,073.99 9,81,021.80s

Advances (Rs. Crores)

2,47,049.73 2,13,543.05 7,70,935.26

All figures as on 31/03/2010

For the purpose of making comparison, the growth rate in deposits and advances of BOB and SBI is increased by 22% (industry trend) from FY10 figures.

As stated by the table, post merger our bank would become stronger than its biggest competitor, Bank of Baroda, and inch a step closer to the India’s largest bank, SBI

The deposits and advances for our bank would be greater by 15.57% and 15.70%, respectively, as compared to BOB.

Even in terms of geographic reach, BOI will have an edge as compared to BOB, with its now vast network of 4430 branches, especially in the Western parts of the country.

Thus, the proposal to merge Bank of India with Dena Bank would lead to immense financial and operational synergies and help our bank to effectively achieve its long term objectives.

35

Not the End….But a New Beginning

Page 37: Consolidation in Indian Banking Industry - The M & A Way

BIBLIOGRAPHY

36