Merger Report of HDFC-CBOP by Atmakuri Rammohan

Merger Report of HDFC-CBOP

Submitted to

Submitted by

Prof.Padmavathi

Atmakuri Ram Mohan

Merger Report of HDFC & CBOP

ACKNOWLEDGEMENT

Nothing can be gained or acquired without hard work which leads to success. The success of my work is the amalgamation of my hard work, my knowledge and pain. I’m deeply grateful to my Prof Padmavathi madavan, who graciously spared her time to share her views and whose unstinted support and cooperation enabled this project to see the light of the day. We were thankful and immensely obliged for her constant guidance and words of inspiration I’m thankful to IT dep of IFIM Bschool who helped a lot in completion of project and provided the wifi & computer lab.

Above all we have no words to express my gratitude to the almighty GOD who blessed us the wisdom and enlightened me to complete this project.

Atmakuri Ram Mohan, IFIM Bschool, Bangalore


Snap Shot of Merger  The swap ratio of 1:29 for HDFC-CBOP merger turned out to be more favorable for HDFC Bank than expected by the market  The swap ratio was based on the recommendations made by joint valuers Dalal & Shah, a chartered accounting firm, and Ernst & Young, a consulting firm.  HDFC held 23.28 per cent in HDFC Bank at the end of December 31, 2007. HDFC will need about Rs 3,900 crores to raise its shareholding after it falls to around 19 per cent after the merger.  The acquisition of Centurion Bank of Punjab (CBoP) - Rs 9,510 crore in the financial sector in India. However, the merged entity would still be two-fifth the size of the country’s second largest lender, ICICI Bank.  The market cap to branch ratio of HDFC Bank is Rs.721m where the same for CBOP is Rs. 238m. Hence, HDFC Bank has been able to buy the franchisee of CBOP at almost one-third of what the market is currently giving to its own franchisee.  If HDFC Bank manages to improve the productivity of these branches to even half the levels of HDFC Bank branches, the merger will become positive in longer term.  The merger was EPS dilutive for HDFC Bank in the interim  The profitability ratios of CBoP are quite low, this looked an expensive proposition for HDFC in the short run  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.  CBoP’s strong SME relationships will complement HDFC bias towards highly rated corporates 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  CBoP currently has a weaker asset profile with net NPAs of 1.6% as against 0.4% for HDFC Bank. Going forward, HDFC Bank (combined entity) would aim to maintain its NPA profile at these levels, which would require a charge of ~Rs2bn



SWOT Analysis of banking sector of India

.

STRENGTH ■ Indian

banks have compared favorably on growth, asset quality and profitability with other regional banks over the last few years. The banking index has grown at a compounded annual rate of over 51 per cent since April 2001 as compared to a 27 per cent growth in the market index for the same period. ■ Policy makers have made some notable changes in policy and regulation to help strengthen the sector. These changes include strengthening prudential norms, enhancing the payments system and integrating regulations between commercial and co-operative banks. ■ Bank lending has been a significant driver of GDP growth and employment. ■ Extensive reach: the vast networking & growing number of branches & ATMs. Indian banking system has reached even to the remote corners of the country. ■ The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private banks of India. ■ In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. ■ India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that is with the Government of India holding a stake)after merger of New Bank of India in Punjab National Bank in


Merger Report of HDFC & CBOP 1993, 29 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and6.5% respectively. ■ Foreign banks will have the opportunity to own up to 74 per cent of Indian private sector banks and 20 per cent of government owned banks.

WEAKNESS ■ PSBs

need to fundamentally strengthen institutional skill levels especially in sales and marketing, service operations, risk management and the overall organizational performance ethic & strengthen human capital. ■ Old private sector banks also have the need to fundamentally strengthen skill levels. ■ The cost of intermediation remains high and bank penetration is limited to only a few customer segments and geographies. ■ Structural weaknesses such as a fragmented industry structure, restrictions on capital availability and deployment, lack of institutional support infrastructure, restrictive labour laws, weak corporate governance and ineffective regulations beyond Scheduled Commercial Banks (SCBs), unless industry utilities and service bureaus. ■ Refusal to dilute stake in PSU banks: The government has refused to dilute its stake in PSU banks below 51% thus choking the headroom available to these banks for raining equity capital. ■ Impediments in sectoral reforms: Opposition from Left and resultant cautious approach from the North Block in terms of approving merger of PSU banks may hamper their growth prospects in the medium term.

OPPORTUNITY ■ The market

is seeing discontinuous growth driven by new products and services that include opportunities in credit cards, consumer finance and wealth management on the retail side, and in fee-based income and investment banking on the wholesale banking side. These require new skills in sales & marketing, credit and operations.


Merger Report of HDFC & CBOP ■ Banks will no longer enjoy windfall treasury gains that the decade-long secular decline in interest rates provided. This will expose the weaker banks. ■ With increased interest in India, competition from foreign banks will only intensify. ■ Given the demographic shifts resulting from changes in age profile and household income, consumers will increasingly demand enhanced institutional capabilities and service levels from banks. ■ New private banks could reach the next level of their growth in the Indian banking sector by continuing to innovate and develop differentiated business models to profitably serve segments like the rural/low income and affluent/HNI segments; actively adopting acquisitions as a means to grow and reaching the next level of performance in their service platforms. Attracting, developing and retaining more leadership capacity ■ Foreign banks committed to making a play in India will need to adopt alternative approaches to win the “race for the customer” and build a value-creating customer franchise in advance of regulations potentially opening up post 2009. At the same time, they should stay in the game for potential acquisition opportunities as and when they appear in the near term. Maintaining a fundamentally long-term value-creation mindset. ■ Reaching in rural India for the private sector and foreign banks. ■ With the growth in the Indian economy expected to be strong for quite some time especially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. ■ the Reserve Bank of India (RBI) has approved a proposal from the government to amend the Banking Regulation Act to permit banks to trade in commodities and commodity derivatives. ■ Liberalization of ECB norms: The government also liberalized the ECB norms to permit financial sector entities engaged in infrastructure funding to raise ECBs. This enabled banks and financial institutions, which were earlier not permitted to raise such funds, explore this route for raising cheaper funds in the overseas markets. ■ Hybrid capital: In an attempt to relieve banks of their capital crunch, the RBI has allowed them to raise perpetual bonds and other hybrid capital securities to shore up their capital. If the new instruments find takers, it would help PSU banks, left with little headroom for raising equity. Significantly, FII and NRI investment limits in these securities have been fixed at 49%, compared to 20% foreign equity holding allowed in PSU banks.



THREATS ■ Threat of stability of the system: failure of some weak banks has often threatened the stability of the system. ■ Rise in inflation figures which would lead to increase in interest rates. · ■ Increase in the number of foreign players would pose a threat to the PSB as well as the private players. ■ Increase in CRR rate



PORTER’s 5 Force Model for INDIAN BANKING INDUSTRY

Barriers to entry  Product differentiation very difficult  Licensing requirement

Bargaining power of Suppliers is very low  Nature of suppliers  Few alternatives  RBI rules and regulations  Suppliers are not concentrated  forward integration

Threat of competitors       

Large no of banks High market growth rate Low switching costs Undifferentiated services High fixed cost  High exit barriers

Threat of Substitute  Non banking financial sector increasing rapidly  Deposits in posts  Stock Market  NBFC  Mutual Fund


Bargaining power of consumer very high  Large no. of alternatives  Low switching costs  Undifferentiated services  Full information about  the market


HDFC BANK AND CENTURION BANK OF PUNJAB MERGER About HDFC Bank Promoted in 1995 by Housing Development Finance Corporation (HDFC), India's leading housing finance company, HDFC Bank is one of India's premier banks providing a wide range of financial products and services to its over 11 million customers across over three hundred cities using multiple distribution channels including a pan-India network of branches, ATMs, phone banking, net banking and mobile banking. Within a relatively short span of time, the bank has emerged as a leading player in retail banking, wholesale banking, and treasury operations, its three principal business segments. The bank's competitive strength clearly lies in the use of technology and the ability to deliver world-class service with rapid response time. Over the last 13 years, the bank has successfully gained market share in its target customer franchises while maintaining healthy profitability and asset quality. As on December 31, 2007, the Bank had a network of 754 branches and 1,906 ATMs in 327 cities. For the quarter ended December 31, 2007, the bank reported a net profit of Rs. 4.3 billion, up 45.2%, over the corresponding quarter of previous year. Total deposits were Rs. 993.9 billion, up 48.9% over the corresponding quarter of previous year. Total balance sheet size too grew by 46.7% to Rs.1,314.4 billion.

SWOT Analysis – HDFC SWOT Analysis is a strategic planning method used to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a project or in a business venture. It involves specifying the objective of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieving that objective. The technique is credited to Albert Humphrey, who led a convention at Stanford University in the 1960s and 1970s using data from Fortune 500 companies.

STRENGTHS 1. HDFC is the strongest and most venerable play on Indian mortgages over the long term. The management of the bank is termed to be one of the best in the country. 2. HDFC has differentiated itself from its peers with its diversified network and revamped distribution strategy 3. HDFC has been highly proactive in passing on the cost and benefit to customers.


Merger Report of HDFC & CBOP 4. Besides the core business, HDFC’s insurance, AMC, banking, BPO, and real estate private equity businesses are also growing at a rapid pace and the estimated value of its investments/subsidiaries explains ~30% of HDFC’s market capitalization. 5. High degree of customer satisfaction. 6. Lower response time with efficient and effective service. 7. Dedicated workforce aiming at making a long-term career in the field. 8. Products have required accreditations. 9. Superior customer service vs. competitors 10. Large share of low-cost deposits, higher net interest margin 11. Better quality of assets, NPA of 0.4 per cent 12. Free float available, FIIs can buy its stock 13. Higher profitability

WEAKNESSES 1. High dependence on individual loans. 2. Major stake held by American financial groups which are under stress due to economic slowdown. 3 .Customer service staff needs training. 4. Processes and systems, etc need to be better managed 5. Management cover insufficient. 6. Sectoral growth is constrained by low unemployment levels and competition for staff 7. Marginal international presence 8. No next line of leadership 9. Not very aggressive in M&A space, growing only organically 10. Possible takeover target

OPPURTUNITIES 1. Fast growing insurance business in the country. 2. Untapped rural markets. 3. Could extend to overseas broadly 4. Fast-track career development opportunities on an industry-wide basis. 5.An applied research centre to create opportunities for developing techniques to provide ad dedvalue services. 6. Unique partnership to create job opportunities for IFBI’s PGDBO students 7. HDFC bank automates business processes with Staff ware; HDFC Bank anticipates major cost savings whilst maintaining high levels of customer service thanks to new enterprise software agreement. 8. HDFC Bank plans to set up a non-banking finance company (NBFC) to undertake fund-based activities.


Merger Report of HDFC & CBOP 9.In recent times, India has witnessed entry of many international banks like CITI Bank, YES Bank etc which posses an external entrant threat to HDFC Bank – as this Banks are known for their art of working and maintain high standards of customer service. 10. After showing a significant growth overall, India is able to attract many international financial & banking institutes, which are known for their state of art working and keeping low operation costs.

THREATS 1. Loss of market share to commercial banks and HFC’s 2. Higher than expected increase in funding cost 3. Risk of fraud and NPA accretion due increasing in interest rates and fall in property prices is inherent to the mortgage business 4. Lack of infrastructure in rural areas could constrain investment. 5. High volume/low cost market is intensely competitive. 6. Very high competition prevailing in the industry 7. Extension overseas holds a lot of risk! 8. Threat from credit card collections dept. 9. Varying and In-Convenient ECS dates. 10. Unlike Government Banks, an account needs a minimum balance of Rs.10, 000

About Centurion Bank of Punjab Centurion Bank of Punjab is one of the leading new generation private sector banks in India. The bank serves individual consumers, small and medium businesses and large corporations with a full range of financial products and services for investing, lending and advice on financial planning. The bank offers its customers an array of wealth management products such as mutual funds, life and general insurance and has established a leadership 'position'. The bank is also a strong player in foreign exchange services, personal loans, mortgages and agricultural loans. Additionally the bank offers a full suite of NRI banking products to overseas Indians. On August 29, 2007, Lord Krishna Bank (LKB) merged with Centurion Bank of Punjab, post obtaining all requisite statutory and regulatory approvals. This merger has further strengthened the geographical reach of the Bank in major towns and cities across the country, especially in the State of Kerala, in addition to its existing dominance in the northern part of the country. Centurion Bank of Punjab now operates on a strong nationwide franchise of 394 branches and 452 ATMs in 180 locations across the country, supported by employee base of over 7,500 employees. In addition to being listed on the major Indian stock exchanges, the Bank’s shares are also listed on the Luxembourg Stock Exchange.



REASON FOR MERGER The company was amongst the first to get a banking license, the first to do a merger in the private sector with Times Bank in 1999, and now after the merger of Centurion Bank of Punjab, it was the largest merger in the private sector banking space in India. HDFC Bank was looking for an appropriate merger opportunity that would add scale, geography and experienced staff to its franchise. This opportunity arose and the bank thought it is an attractive route to supplement HDFC Bank’s organic growth. The bank believes that Centurion Bank of Punjab would be the right fit in terms of culture, strategic intent and approach to business. The HDFC Bank-CBoP merger is expected to be a win-win for both banks in terms of both asset size and footprint. While CBoP is concentrated in the northern and southern parts of the country, HDFC Bank is focused throughout India. These are exciting times for the Indian banking industry. The proposed merger will position the combined entity to significantly exploit opportunities in a market globally recognized as one of the fastest growing. This is particularly bullish about the potential of business synergies and cultural fit between the two organizations. The combined entity will be an even greater force in the market. Over the last few years, Centurion Bank of Punjab has set benchmarks for growth. The bank on that day has a large nationwide network, an extremely valuable franchise, 7,500 talented employees, and strong leadership positions in the market place. It is believe that the merger with HDFC Bank will create a world class bank in quality and scale and will set the stage to compete with banks both locally as well on a global level.

MERGER DETAILS: The merger between HDFC Bank and Centurion bank of Punjab has been finalized on 26 Feb., 2008. The swap ratio for merger is around 29 shares of Re 1 of CBoP, an investor will get one share of Rs 10 of HDFC Bank. In last two days, at the time of merger the share price of CBoP moved from Rs 49.85 to Rs 56.40. However, it seems, investors of HDFC Bank did not like the development. The share price of HDFC Bank on Thursday moved up from Rs 1,534.50 to Rs 1,543. But in next day, it fell sharply to Rs 1,475. Prior to this, in August 2007, CBoP was merged with Lord Krishna bank. Approved a swap ratio of 1:29 (one share of HDFC Bank for every 29 shares of Centurion Bank of Punjab held), for the proposed merger of Centurion Bank of Punjab with HDFC Bank. The name of the bank would remain as HDFC Bank. The combined entity would have a nation-wide network of 1,148 branches, the largest among private sector banks, A strong deposit base of around Rs. 120,000 crore and net advances of around Rs. 85,000 crore. The balance-sheet size of the combined entity would be over Rs. 150,000 crore.


Merger Report of HDFC & CBOP Before Merging of CBoP with HDFC bank, the CBoP has acquired Lord Krishna Bank ltd. The details of the merger of Lord Krishna Bank with CBop is The Reserve Bank of India has sanctioned the Scheme of Amalgamation of Lord Krishna Bank Ltd. with Centurion Bank of Punjab Ltd. The Scheme has been sanctioned in exercise of the powers contained in Sub-section (4) of Section 44A of the Banking Regulation Act, 1949. The Scheme will come into force with effect from August 29, 2007. All the branches of Lord Krishna Bank Ltd. will function as branches of Centurion Bank of Punjab Ltd. with effect from August 29, 2007. The LKB-CBoP merger in the ratio 5:7 was approved by the AGMs of the respective banks in September 2006. However, one of the shareholders Umeshkumar Pai had challenged the merger and had sought an investigation into the affairs of LKB, while arguing that the decision was taken without sufficient discussion and many shareholders were not permitted in the meeting hall. The merger will add Rs 300 crore to CBoP’s balance sheet, which is around Rs 18,480 crore at present, and another 112 branches to its current 279 branches. CBoP plans to add more than 200 branches by December 2007. The all-stock merger deal of LKB with CBoP followed the acquisition of Bank of Punjab by Centurion Bank, after which it was rechristened as CBoP.



3 years Financials of HDFC and CBOP before Merger Balance Sheet of HDFC Bank HDFC

Capital and Liabilities: Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Net Worth Deposits Borrowings Total Debt Other Liabilities & Provisions Total Liabilities Assets Cash & Balances with RBI Balance with Banks, Money at Call Advances Investments Gross Block Accumulated Depreciation Net Block Capital Work In Progress Other Assets Total Assets Contingent Liabilities Bills for collection Book Value (Rs)

Mar '05

------------------- in Rs. Cr. ------------------Mar '06 Mar '07

12 mths

12 mths

12 mths

309.88 309.88 0.43 0 4,209.97 0 4,520.28 36,354.25 5,290.01 41,644.26 5,264.46 51,429.00

313.14 313.14 0.07 0 4,986.39 0 5,299.60 55,796.82 4,560.48 60,357.30 7,849.49 73,506.39

319.39 319.39 0 0 6,113.76 0 6,433.15 68,297.94 2,815.39 71,113.33 13,689.13 91,235.61

2,650.13 1,823.87

3,306.61 3,612.39

5,182.48 3,971.40

25,566.30 19,349.81 1,290.51 582.19 708.32 0 1,330.57 51,429.00

35,061.26 28,393.96 1,589.47 734.39 855.08 0 2,277.09 73,506.39

46,944.78 30,564.80 1,917.56 950.89 966.67 0 3,605.48 91,235.61

84,585.95 5,342.70 145.86

138,898.60 5,239.26 169.24

202,126.73 7,211.88 201.42


Merger Report of HDFC & CBOP P&L Account of HDFC Bank

Schedule Year ended Year ended I. INCOME Interest earned Other income Total II. EXPENDITURE Interest expended Operating expenses Provisions and contingencies [includes provision for income tax and fringe benefit tax of Rs. 382,73 lacs (previous year: Rs. 313,38 lacs)] Total III. PROFIT Net profit for the year Profit brought forward Transfer from investment fluctuation reserve Total IV. APPROPRIATIONS Transfer to Statutory Reserve Proposed dividend Tax (including cess) on dividend Cess on dividend pertaining to previous year paid during the year Transfer to General Reserve Transfer to Capital Reserve Transfer to investment fluctuation reserve Balance carried over to Balance Sheet Total V. EARNINGS PER EQUITY SHARE (Face value Rs. 10/- per share) 18 Rs. Rs. Basic Diluted

(Rs. lacs) 31-03-05

(Rs. lacs) 31-03-06

(Rs. lacs) 31-03S-07

3,093,49 651,34 3,744,83

4,475,34 1,123,98 5,599,32

6,647,93 1,516,23 8,164,16

1,315,56 1,085,40 678,31

1,929,50 1,691,09 1,107,95

3,179,45 2,420,80 1,422,46

3,079,27

4,728,54

7,022,71

665,56 405,32 1,070,88

870,78 602,34 484,19 1,957,31

1,141,45 1,455,02

166,39 140,07 19,64

217,70 172,23 24,16

285,36 223,57 38,00

26 66,56 62 75,00 602,34 1,070,88

87,08 1,12 1,455,02 1,957,31

35 114,14 4 2,98 1,932,03 2,596,47

22.92 21.64

27.92 26.33

36.29 36.06


2,596,47

Merger Report of HDFC & CBOP Centurion Bank of Punjab Financials Balance Sheet in Rs. Cr.

Capital and Liabilities: Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Net Worth Deposits Borrowings Total Debt Other Liabilities & Provisions Total Liabilities Assets Cash & Balances with RBI Balance with Banks, Money at Call Advances Investments Gross Block Accumulated Depreciation Net Block Capital Work In Progress Other Assets Total Assets Contingent Liabilities Bills for collection Book Value (Rs)

Mar '05

Mar '06

Mar '07

12 mths

12 mths

12 mths

101.32 101.32 0 0 488.72 0 590.04 3,530.38 43.75 3,574.13 447.51 4,611.68

140.83 140.83 0 0 790.37 0 931.2 9,399.64 51.57 9,451.21 947.78 11,330.19

156.69 156.69 0 0 1,239.41 0 1,396.10 14,863.72 930.89 15,794.61 1,292.07 18,482.78

331.9 131.04 2,193.95 1,479.64 670.4 533.97 136.43 0 338.72 4,611.68

556.52 489.52 6,533.44 2,922.83 887.13 577.57 309.56 1.74 516.58 11,330.19

1,079.14 410.19 11,221.35 4,614.96 930.55 593.67 336.88 0.43 819.83 18,482.78

1,394.82 458.28 5.82

4,475.78 820.04 6.61

5,141.44 1,680.34 8.91


Merger Report of HDFC & CBOP Centurion Bank of Punjab Profit & Loss account

Income Interest Earned Other Income Total Income Expenditure Interest expended Employee Cost Selling and Admin Expenses Depreciation Miscellaneous Expenses Preoperative Exp Capitalised Operating Expenses Provisions & Contingencies Total Expenses Net Profit for the Year Extraordionary Items Profit brought forward Total Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs) Appropriations Transfer to Statutory Reserves Transfer to Other Reserves Proposed Dividend/Transfer to Govt Balance c/f to Balance Sheet Total

in Rs. Cr. Mar '05

Mar '06

Mar '07

12 mths

12 mths

12 mths

346.09 72.2 418.29

803.2 311.37 1,114.57

1,268.53 440.66 1,709.19

168.21 42.7 126.11 29.73 21.39 0 226.81 -6.88 388.14

404.43 139.27 282.77 51.48 114.14 0 577.71 9.95 992.09

698.95 221.31 297.44 56.97 313.14 0 746.06 142.8 1,587.81

30.15 2.7 -131.39 -98.54 0 0 0

122.48 0 -121.39 1.09 0 0 0

121.38 0 73.72 195.1 0 0 0

0.3 0 5.82

0.87 0 6.61

0.77 0 8.91

15.11 -121.39 0 -121.39 -227.67

-107.31 0 0 73.72 -33.59

30.35 0 0 164.75 195.1


Merger Report of HDFC & CBOP Pre Merger Analysis of HDFC and CBOP Ratio analysis EPS HDFC CBoP

Mar '05 21.47832 0.24

Mar '06 27.81 0.62

Mar '07 35.74 0.77

EPS EPS

30 20

HDFC

10

CBoP

0 Mar '05

Mar '06

Mar '07

In HDFC there is around 30% growth in EPS on year on year basis but Coming to CBOP bank , its Earning is very less not even 1 rupee. DPS HDFC CBoP

Mar '05 4.5 -

Mar '06 5.5 -

Mar '07 7 -

Dividend payout Ratio HDFC CBoP

Mar '05 20.95136 0

Mar '06 19.77706 0

Mar '07 19.5859 0

HDFC is paying dividends to their share holders every year, but in the case of CBoP it is not paying any dividends to their share holders.

Profitability Ratios: Operating margin (%) HDFC CBoP

Mar '05 24.65 11.02

Mar '06 29.56 10.85

Mar '07 33.15 15.69

The operating margin of HDFC gradually increases Y-to-Y. The operating margin of CBoP is moderate with increase and decrease.


Merger Report of HDFC & CBOP Gross profit margin (%) HDFC CBoP

Mar '05 21.45 3.78

Mar '06 26.35 5.92

Mar '07 30.5 12.23

Net profit margin (%) HDFC CBoP

Mar '05 14.24 5.96

Mar '06 15.55 8.28

Mar '07 13.57 7.25

ROCE HDFC CBoP

Mar '05 4.02 5.11

Mar '06 4.18 5.36

Mar '07 5.02 4.99

Gross Profit and Net Profit Margins of Both are increasing year on year by % of range may be different due its scale of Business. Coming to Most important Ratio ROCE for HDFC there is Steady Growth but Coming to CBOP its different story.

Liquidity Ratios: Current ratio HDFC CBoP

Mar '05 0.28 0.75

Mar '06 0.29 0.54

Mar '07 0.26 0.63

HDFC maintaining its current assets and current liabilities almost in constant way. In the case of CBoP the current ratio is high in 2005 compare to preceding years means it has high liquidity in 2005, in 2005 it goes down and again in 2007 it moves up. Quick ratio HDFC CBoP

Mar '05 4.89 6.4

Mar '06 5.18 8.03

Mar '07 4.07 10.15

The high liquidity position of HDFC is less compare to High Liquidity position of CBoP. This shows CBoP may have more cash and cash equivalents compare to their current liabilities. Total debt/equity HDFC CBoP

Mar '05 10.32 5.98

Mar '06 10.53 10.09

Mar '07 10.62 10.65

The debt portion in bank is almost 10.5 times to equity portion. It shows HDFC has more debts. In CBoP the debt portion increased from year to year. Compare CBoP, HDFC doing good.


Merger Report of HDFC & CBOP On the net interest margin front, HDFC Bank has a net interest margin of 4.3% while CBOP has an NIM of 3.6%. The current and savings account (CASA) stands at 50.9% and 24.5% for HDFC Bank and CBOP, respectively. Talking about the NPAs, HDFC Bank has a very low NPA of 0.4% as against 1.69% for CBoP. The capital adequacy for HDFC Bank stands at 13.8% as against 11.5% for CBoP. Analysts say the merger will create a strong banking entity.

EPS Analysis before Merger  The earnings of HDFC bank in 2007is rs11414500000  The earnings of CBoP in 2007 is 1213800000  Number of shares of HDFC bank in 2007 is 319389608  Number of shares of CBoP in 2007 is1698989540  EPS of HDFC Bank in 2007 is rs 35.74 per share  EPS of CBoP in 2007 is rs 0.72 per share  The swap ratio for the merger is 1 share of HDFC bank for every 29 shares held by CBoP  Exchange Ratio=1 share of HDFC/29 shares of CBoP=0.03448  The total number of shares in the merged entity=319389608+(0.03448*1698989540) =377975454 shares  EPS12=(11414500000+1213800000)/ 377975454=33.41

Pre Merger Post Merger

HDFC Bank EPS 35.74 33.41

CBoP EPS 0.72 1.15

From the EPS analysis we can say that the target company CBoP gains and the acquiring company HDFC losses. So there may be some synergy loss for the HDFC bank. In pre merger the EPS of CBoP is 0.72. After Merger the EPS raise to 1.15 that is almost 160% for the Pre merger EPS. In pre merger the HDFC EPS is 35.74 per share. After merger the EPS for HDFC is falls to 33.41 per share. That’s why the share holders of the HDFC bank do not have the interest for merging of CBoP in HDFC bank. The share holders of CBoP were happier for this merger. Because of this merger proposal the share value of the CBoP has increased on that day and the share price of the HDFC Bank has decreased.



3 years Financials of HDFC and CBOP after Merger POST MERGER BALANCE SHEET B/s of HDFC

Capital and Liabilities: Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Net Worth Deposits Borrowings Total Debt Other Liabilities & Provisions Total Liabilities Assets Cash & Balances with RBI Balance with Banks, Money at Call Advances Investments Gross Block Accumulated Depreciation Net Block

------------------- in Rs. Cr. ------------------Mar '08 12 mths

Mar '09 12 mths

Mar '10 12 mths

354.43 354.43 0 0 11,142.80 0 11,497.23 100,768.60 4,478.86 105,247.46 16,431.91 133,176.60

425.38 425.38 400.92 0 14,226.43 0 15,052.73 142,811.58 2,685.84 145,497.42 22,720.62 183,270.77

457.74 457.74 0 0 21,064.75 0 21,522.49 167,404.44 12,915.69 180,320.13 20,615.94 222,458.56

12,553.18

13,527.21

15,483.28

2,225.16 63,426.90 49,393.54 2,386.99 1,211.86 1,175.13

3,979.41 98,883.05 58,817.55 3,956.63 2,249.90 1,706.73

14,459.11 125,830.59 58,607.62 4,707.97 2,585.16 2,122.81


Merger Report of HDFC & CBOP Capital Work In Progress Other Assets Total Assets

0 4,402.69 133,176.60

0 6,356.83 183,270.78

0 5,955.15 222,458.56

Contingent Liabilities Bills for collection Book Value (Rs)

582,835.94 17,092.85 324.38

396,594.31 17,939.62 344.44

466,236.24 20,940.13 470.19

P&L Account of HDFC POST MERGER HDFC Particulars I. INCOME Interest earned Other income Total II. EXPENDITURE Interest expended Operating expenses Provisions and contingencies [includes provision for income tax and fringe benefit tax of Rs. 382,73 lacs (previous year: Rs. 313,38 lacs)] Total III. PROFIT Net profit for the year Profit brought forward Transfer from investment fluctuation reserve Total IV. APPROPRIATIONS Transfer to Statutory Reserve Proposed dividend Tax (including cess) on dividend Cess on dividend pertaining to previous year paid during the year Transfer to General Reserve Transfer to Capital Reserve Transfer to investment fluctuation reserve Balance carried over to Balance Sheet Total V. EARNINGS PER EQUITY SHARE (Face value Rs. 10/- per share) 18 Rs. Rs.

31-Mar-08 31-Mar-09

31-Mar-10

1011500 228315 1239815

1,633,226 329,060 1,962,286

1,617,290 380,761 1,998,051

488712 374562 217523

891,110 553,281 293,402

778,630 576,448 348,103

1080797

1,737,793

1,703,181

159018 193203

224,494 257,463

294,870 345,557

352221

481,957

640,427

39755 30127 5120

56,123 42,538 7,229

73,718 54,929 9,123

6 15902

59 22,449 9,387 -1,386 345,557 481,957

93 29,487 19,946 -149 453,279 640,427

-


3850 257461 352221

Merger Report of HDFC & CBOP Basic Diluted

46.22 45.59

52.85 52.59

67.56 66.87

Post Merger Key Ratios EPS DPS Operating margin (%) Gross profit margin (%) Net profit margin (%) ROCE

Mar ' 08 44.87 8.5 30.78 28.58 12.82 5.20

Mar ' 09 52.77 10 19.87 18.05 11.35 5.96

Mar ‘10 64.42 12 24.36 22.39 14.76 4.96

Conclusion 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.  CBoP’s strong SME relationships will complement HDFC bias towards highly rated corporates 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.


Merger Report of HDFC-CBOP by Atmakuri Rammohan

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