IN FOCUS M&A in the INDIAN BANKING INDUSTRY According to Indian Bank’s Association Banking Industry Vision 2010, mergers and acquisitions would gather momentum as managements strive to meet the expectations of stakeholders 42 Need the Dough July-October - 2007
MERGERS & ACQUISITIONS Consolidation is a dominant feature of the banking sector in most countries today. A major Process of Mergers and Acquisitions (M&A) has helped in consolidation of the banking industry. Most large banks in the world have been acquiring repeatedly smaller and larger banks in their countries and elsewhere and the process of integration has been generally smooth and successful. This has given a further impetus to this the consolidation activity in banks through M&A. While a merger involves a marriage of two or more banks, an acquisition involves one bank taking over ownership of the other. It is generally accepted that mergers and acquisitions promote synergies and economies of scale. <strong>The</strong> basic idea is that the combined entity will create more value than the individual banks operating independently not only for the stakeholders, but also for customers and the industry in general. In Asia, Malaysia has reduced the number of banks from 55 to 10, Taiwan is working towards bringing down the number of state banks from to 6 from 12 this year and the Singapore Government has guided the system down to three players with DBS being supported to become a regional leader. Similar initiatives are being taken in Indonesia, South Korea and Japan. Only 22 of the Indian banks figure among the top 1,000 banks in the world. In Asia, State Bank of India (SBI), the largest in India, is the only entity that has made it to the top-25 list. In comparison, China’s fourth-largest bank is 2.5 times that of SBI. <strong>The</strong> market capitalization of the entire Indian banking sector is about $40-45 billion, which would make the entire Indian banking sector rank after the 30 largest banks in the world. <strong>The</strong> present capital structure of public sector banks will make them vulnerable to takeovers unless M&As take place on a significant scale. It is necessary for Indian banks to complete these M&A activities by 2008-09, to ensure that they have the strength and size to take on competition from foreign banks, once sector opens up almost completely to foreign banks. Foreign banks are eagerly waiting for the regulator to open up the sector in April 2009, when RBI is set to review bank ownership norms. Meanwhile, these banks are gradually buying minor stakes upto permitted levels in local banks and also setting up non-bank finance companies (NBFCs), which can perform most banking functions except for opening and maintaining savings bank accounts. Just as in any other sector, consolidation in the banking industry, in India and elsewhere, provides for value maximization as well as non-value maximization and is also of great relevance for the long term growth prospects of the national economy. <strong>The</strong> major gains perceived from bank consolidation are the ability to withstand the pressures of emerging <strong>global</strong> competition, to strengthen the performance of the banks, to effectively absorb the new technologies and demand for sophisticated products and services, to enable funding for major development products in the realm of infrastructure, telecommunication, etc. which require huge financial outlays and to streamline human resources functions and skills in tune with the emerging competitive environment. Also, Basel II norms on capital adequacy, capitalization and risk management, which will require banks to have minimum CAR of 12.5% as against the present 9%, will encourage the banks to move towards consolidation. Profit maximization is no longer the only objective No. of M&As 35 30 25 20 15 10 5 M&A Activity before Nationalisation of Indian Bank: 0 1961 1962 1963 1964 1965 1966 1967 1968 1969 Source : Banknet India for banks, wealth maximization (that is increasing the wealth of shareholders) and protecting the interest of shareholders by ensuring financial stability is the new goal. Consolidation will enable banks to have a much stronger balance sheet thereby increasing value to shareholders. July-October - 2007 Need the Dough 43
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