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Sanjeev Agrawal, Partners / Head of Valuations, Ernst & Young said CBoP is yet to fully realize its mergers with Central Bank of Punjab and Lord Krishna Bank. “The bank has also got an NRI franchise and a significant number of branches, which are not fully leveraged upon. So, that will again benefit HDFC Bank.”
Sanjeev Agrawal , Partners / Head of Valuations, Ernst & Young , said they have used income-based, net-asset based value, and market priced method to arrive at the merger ratio of HDFC Bank and Centurion Bank of Punjab .
CBoP is yet to fully realize its mergers with Central Bank of Punjab and Lord Krishna Bank , he said. “The bank has also got an NRI franchise and a significant number of branches, which are not fully leveraged upon. So, that will again benefit HDFC Bank.”
Excerpts from CNBC-TV18’s exclusive interview with Sanjeev Agrawal:
Q: How has this merger worked out? What financial parameters did you look at in arriving at the 29:1 ratio in favor of HDFC Bank?
A: We always look at the financial information as well as the non-financial qualitative information available. We have considered their financial accounts for 2006-07, subsequent period of financial accounts and the previous year’s financial accounts as well.
We have also looked at off-balance sheet items like conditional liabilities, ESOPs, and warrants, etc. We have used income-based method and net-asset based value method. We have used the market priced method as well.
Q: Is it going to lead to some amount of dilution? How long will it take HDFC to get back to its return on equity?
A: In immediate terms, there might be some dilution. But it depends upon whether you are looking at a longer-term period average.
HDFC Bank is quoting a slight premium to the market price. One has to look at it with a slightly longer-term view. As part of the deal, HDFC Bank is getting 400 branches versus their less than 800 branches. So, for 20% stake, they are getting almost half the branches.
Even ATMs are slightly bigger than the proportion and the deposit base is also better than the ratio. So, they are buying into the branch network of Centurion BoP and that is how they will benefit ultimately.
Q: If you look at the NPA positions of both the banks, HDFC stands at Rs 280 crore. They will be taking about Rs 260 crore of NPA worth of books as well. The net interest margins have a spread of 70 basis points between HDFC Bank and Centurion BoP. How significantly did you weigh these two parameters while valuing the company? What is your assessment for what the NIMs could look like for the merged entity?
A: The NIM for HDFC Bank was 4.32%. In case of CBoP, it was slightly lower, and may come down to about 4-4.1%. So, it won’t be a significant challenge. The deposit base of the low cost deposit is better than the ratio we have provided. So, to that extent HDFC Bank will benefit.
One should note that CBoP has got two mergers back on back. They first got Central Bank of Punjab in 2005. Then, they got Lord Krishna Bank in 2006. Both these mergers are yet to be fully realized, particularly Lord Krishna Bank, because that got approved in August 2007. It has got an NRI franchise and a significant number of branches, which are not fully leveraged upon. So, that will again benefit HDFC Bank.
Tags: Sanjeev Agrawal, Ernst & Young, HDFC Bank, Centurion Bank of Punjab, Central Bank of Punjab, Lord Krishna Bank
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