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Impact of Recession on Bank Merger Valuation in context of India
AftermathBig Investment banks have collapsedrescue packages were drawn up more than a trillion US dollarsinterest rates were cut around the world Consequences On Banking SectorIntroduction of BASEL III Global Regulatory Std. In response to the deficiencies in financial regulation revealed by the late-2000s financial crisis. Chapter Introduced bank liquidity and bank leverage
But Indian banking sector is closed to implement BASEL II Norms
Reason For Economic Turmoil Dramatic rise in mortgage delinquencies Foreclosures in the united states with major adverse consequences for banks and financial marketsImpact Of Recession On Bank Merger Valuation In Context Of IndiaThe present study analyses the difference in the valuation approaches during normal and financial crisis period.
IntroductionObjectives of studyWhat is valuationData and methodologyData analysisConclusion
2Introduction Reason for M&A In Banking Motivation to increase the shareholder valueEconomies of scale Cost savings from synergy Geographical diversificationIncreased efficiencyWhat is Valuation Valuation means the intrinsic worth of the company & the price at which market participants are willing to pay or receive to a perfect sale of a business.
Valuation for a merger is done to find out the Exchange Ratio (Swap Ratio) Company A share Value Exchange Ratio (Swap Ratio) = Company B share Value Swap ratio is the ratio at which the target bank receives shares of the bidder bank in exchange of shares in the target bank.
Banks need to arrive at an acceptable swap ratio for a possible merger.
OBJECTIVES OF THE STUDYTo analyze the difference in the valuation of bank mergers in normal and recessionary period.
To discuss the contribution of the financial factors of banks in the valuation.
Data and Methodology
witnessed a total of 23 deals in the post reform period.chosen 3 bank merger deals
DealMerger announcementdatePeriodICICI Bank- Bank of MaduraDec 08, 2000Pre- recessionHDFC Bank- Centurion Bank ofPunjabFeb 23, 2008RecessionICICI Bank- Bank of RajasthanMarch 18, 2010Post-recessionSource: Economic Times: January 2008 to May 2009 denotes recession period based on NSE data Hypothesis of the study areH0: There is no significant difference in the valuation approach during normal and recession period.H1: There is significant difference in the valuation approach during normal and recession period.Data Analysis
Market Value of BOMSwap Ratio Based on Market Price = Market Value of ICICI Bank It could have derived a swap ratio .801 in favor of ICICI bank on the basis of the market price. Bank Of Madura122.5ICICI Bank152.9= 0.801177Bank Of Madura with ICICI Bank (Pre Recession)Source: Annual reports of the banks of the year 2000-20017It could have been 10 shares of ICICI bank for 13 shares of Bank of Madura, if the valuation was done on the basis of balance sheets of both the banks. (105.3 : 45.6) The swap ratio could have been in favor of ICICI Bank, if they had done valuation on the basis of Non-Performing Assets (NPA) of both the banks.(1.3 : 4)
Financial Strategic Ratios Book Value, EPS (Net Profit/shares outstanding),% NPA , Last Dividend Paid Out & CRAR Factors influenced Swap Ratio in merger deal Deal UndefinedTo quote from The Economic Times (as published on 9th December 2000), Swap Ratio could be 10 shares of ICICI Bank for 13 shares of bank of Madura. The ratio could be influenced by NPA level of the two banks.8
Cen. Bank Of Punjab with HDFC Bank (Recession Period)It could have derived a swap ratio (56.4/1474.9) =.038 (in favor of HDFC Bank on the basis of the market price.)
Source: Annual reports of the banks of the year 2007-2008
A slighter Less ratio 0.034 was fixed Due To CBoPs low Book Value and EPS
And Bidder HDFC strategically gains much more like its northern presence after merger Still Cen.bank of Punjab didnt get a Favorable Value
Although Cen.bank of Punjab had fair NPA & fair Profitability & very strong retail customer base (two wheeler loans) in North India
Therefore, it can be stated that it was purely a financial valuation and valuators ignored the strategical factors.
More weightage to financial factors than to strategical factors during recessionary period
Deal UndefinedCen. Bank Of Rajasthan with ICICI Bank (Post Recession Period)
Source: Annual reports of the banks of the year 2009-2010
Deal Undefined1st Deal after recession in which target shareholders benefited i.e. target overpaid Expensive deal for ICICI -- as premium paid was 88.5/shareIf valuation was done only on financials like book value, market value, EPS & NPA Bidder was more favourable ---had to pay lesser ICICI Bank strategy was similar to prev deal --- a strong presence in the north with strong customers base (BoR had 40% CASA A/C ) BoRs 40% CASA A/C had solely criteria of fixation of swap ratio Recessionary periodNon recessionary period Bidders strategy Bidders strategy (geographical diversification & (geographical diversification & strong cust base) strong cust base)
Target Bank had decent NPA & CRAR Target Bank had very less CRAR In other Financial BoR is far below the ICICI bankIn other Financial CBoP is comparable to HDFC bank
Target got undervalued due to recession as bidder stress on fundamental factors n ignore strategic advTarget got overvalued as bidder followedStrategic valuationConclusion
There is significant difference in the valuation approaches during recession and normal period. In normal period, valuators followed strategic valuation and during recession period strategic factors were ignored.
Therefore we accept alternative hypothesis H1 in this study. Public Policy Implications---since recession causes undervaluation and wealth destruction of target banks; they should try to postpone the possible merger to a favourable period.ImplicationsThanks
NARESH MFM 4th SEMParticularsICICI BankBoM
Net profit after tax(Rs /Cr)105.345.6
Market value of share152.9122.5
Book value58.4205.1
EPS6.438.7
NPA (in %)1.34
CRAR (in %)19.6014.3
DealMarket value beforethe dealSwap ratio based onmarket priceActual swap ratio
ICICI BankBank of Madura152.9122.5.8012 (2:1)
ParticularsHDFCBankCBoP
Net profit after tax(Rs / Cr)1143.5121.4
Market value of share1474.3056.00
Book value169.28.6
EPS27.80.8
NPA (in %)0.41.3
CRAR (in %)13.111.1
DealMarket value beforethe dealSwap ratio based onmarket priceActual swap ratio
HDFC BankCenturion Bank ofPunjab1474.956.4.038.034(1:29)
ParticularsICICI BankBoR
Net profit after tax (Rs / Cr)4024.83-102.30
Market value of share901.0082.85
Book value462.1558.04
EPS36.14-6.33
NPA (in %)1.871.6
CRAR (in %)19.407.74
DealMarket value beforethe dealSwap ratio based onmarket priceActual swap ratio
ICICI BankBank of Rajasthan901.182.25.091.211(1:4.72)