Thursday, May 20, 2010

ICICI Looks unattractive right, but may improve profitability

ICICI – BoR Deal Analysis

 

Event

ICICI Bank to acquire Bank of Rajasthan Ltd. (BoR)

The Deal

ICICI Bank will offer 25 shares for every 118 shares of Bank of Rajasthan.

Items

ICICI Bank

BoR

Swap Ratio

25

118

Share Outstanding (Cr)

111

16

Pre Announcement Price (Rs)

890

99

Pre Announcement MCap ( Rs Cr)

99,221

1,597

Deal Value (Rs Cr)

3,042

 

Benefits to ICICI Bank

ICICI Bank is expected to benefit in terms of an addition of 463 braches of BoR to its existing branch network of 2000 branches, which will in turn enhance its earning potentials, return on assets (RoA) and return on equity (RoE).

Analysis

Expensive Deal…

At a swap ratio of 25:118, the deal value comes at Rs 3,042 cr, translating into a P/BV ratio of 5.4x and 2.9x to the adjusted book value of Rs 559 cr and un-adjusted book value of Rs 1,080 cr respectively as on 31st Dec. 2009.

Valuations paid by ICICI Bank looks very expensive, as public sector banks and private sector banks are currently traded at an average P/BV ratio of 1.2x and 2.2x respectively.

 

 

Private Sector Banks

BV

CMP

P/BV

Kotak Mahindra Bank Ltd

128.8

744.2

5.8

HDFC Bank Ltd

469.4

1868.8

4.0

IndusInd Bank Ltd

52.7

180.6

3.4

Axis Bank Ltd

395.6

1205.1

3.0

Yes Bank Ltd

90.8

265.4

2.9

Dhanalakshmi Bank Ltd

66.0

146.5

2.2

Karur Vysya Bank Ltd

248.1

507.2

2.0

City Union Bank Ltd

17.7

33.6

1.9

ICICI Bank Ltd

462.9

825.0

1.8

ING Vysya Bank Ltd

185.2

307.5

1.7

Development Credit Bank Ltd

27.1

44.1

1.6

United Western Bank Ltd (Merged)

18.0

25.9

1.4

Jammu and Kashmir Bank Ltd

621.0

771.9

1.2

South Indian Bank Ltd

129.8

152.3

1.2

Federal Bank Ltd

273.9

312.9

1.1

Karnataka Bank Ltd

136.8

148.7

1.1

Lakshmi Vilas Bank Ltd

73.4

79.6

1.1

Average

                         2.2

 

Public Sector Banks

BV

CMP

P/BV

State Bank of India

1038.8

2214.9

2.1

Punjab National Bank

514.8

1005.4

2.0

Bank of Baroda

375.7

674.7

1.8

Union Bank of India

174.4

294.9

1.7

Andhra Bank

90.9

128.4

1.4

Canara Bank

305.8

423.1

1.4

Central Bank of India

108.2

148.5

1.4

Indian Bank

154.7

209.3

1.4

Bank of India

243.7

323.3

1.3

Corporation Bank

402.6

505.5

1.3

Allahabad Bank

131.7

153.8

1.2

Oriental Bank of Commerce

292.2

324.9

1.1

State Bank of Mysore

575.1

622.1

1.1

Dena Bank

83.4

89.9

1.1

UCO Bank

65.7

70.4

1.1

State Bank of Travancore

568.1

591.2

1.0

Vijaya Bank

53.5

55.5

1.0

IDBI Bank Ltd

113.1

111.6

1.0

Bank of Maharashtra

55.8

54.4

1.0

State Bank of Bikaner and Jaipur

483.5

442.5

0.9

Syndicate Bank

99.9

87.8

0.9

United Bank of India

91.7

78.7

0.9

Indian Overseas Bank

116.5

92.8

0.8

Average

                                 1.2

 

Equity Dilution

Our calculation reveals that at the 25:118 swap ratio, to fund the deal, ICICI Bank will issue about 3.42 cr new shares, which amounts to a 3.1% equity dilution.

Leading to fall in value of ICICI Bank…

Right after the announcement of the deal, share of ICICI Bank shown a heavy selling pressure and finally settled at Rs 825, down by 7.3%. It is interesting to note that ICICI Bank has lost a market cap of around 7,250 cr, which is 2.4 times the deal value. On the other hand, share of Bank of Rajasthan capped at 20% upper circuit, translating into a gain in market cap of Rs 323 cr.

 

Items

ICICI Bank

BoR

Post Announcement Price (Rs)

825

119

Post Announcement Mcap (Rs Cr)

91,975

1,920

MCap Lost/Gain on Announcement (Rs Cr)

(7,246)

323

MCap Lost/Gain to Deal Value

(2.4)

0.1

 

 

Our View

The motive of merger clearly is related to the branch network. At 463 branches, ICICI Bank adds 22% more branches, which otherwise could have taken up to two years to ramp up organically. Owing to higher valuation paid for the deal, ICICI Bank is looking unattractive at current valuations, however once the benefits from additional branches come into play, will led to improvement in profitability.


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Safe Harbor:

The information contained and provided on this Website provides Investment advice for the education of investors. The posts are an information service only. Recommendations, opinions or suggestions are given with the understanding that readers acting on this information assume all risks involved. We do not assume any responsibility or liability resulting from the use of such information, judgment and opinions for Trading or Investment purposes.
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