ICICI Bank on acquisition trail

ICICI Bank leads in confirming interest to acquire United Western Bank.
Indian banks, including ICICI Bank, are looking to acquire United Western Bank (UWB), a lossmaking bank headquartered in western India. The M&A move confirms the attraction of acquiring a well-entrenched branch network, given the time and expense involved in opening new branches in India.

UWB was placed under an order of moratorium by IndiaÆs central bank, the Reserve Bank of India (RBI) on September 2. This means that UWB can only issue payments with RBI approval and depositors can only withdraw up to Rs10,000 ($215) at bank branches. ATMs have been frozen. The RBI was responding to UWBÆs capital adequacy ratio falling to -0.3% as of June 30 compared to the RBI mandated level of 9%.

UWBÆs basic problem is a high level of non-performing assets (NPAs). UWBÆs NPAs are 5.66% compared to its peer group figure of around 2%. Coupled with a low net interest margin of 2%, this led to losses of over Rs1 billion in 2006 up from Rs986 million in 2005. As of December 31, 2005 UWB had NPAs of Rs2.4billion relative to a net worth of Rs2billion. Based on simplistic assumptions based on fiscal 2006 data analysts suggested the acquisition could cost Rs4-5 billion.

UWB has a network of 230 branches, 12 extension counters and 75 ATMs mostly concentrated in the state of Maharashtra. It has a deposit base of only Rs64.8 billion. Ashutosh Narkar, banking analyst at www.indiainfoline.com comments: ôThe strength of UWBÆs network is that it is concentrated in second tier Maharashtran towns. Both the time and cost to market of creating such a network is high, making UWB an attractive targetö.

ICICI Bank, IndiaÆs second largest bank by assets, has created a network of 614 branches and extension counters of which only around 80 are in Maharashtra. Its stated aim is to improve its rural penetration and this also makes UWB a good strategic fit. ICICI Bank has a deposit base of Rs1,724.5 billion. Narkar adds ôUWB will help ICICI Bank consolidate its position in its target segments in agriculture and small and medium enterprisesö.

RBI guidelines stipulate that Indian banks making a takeover proposal must get approval of their board before submitting their interest. Reflecting the importance ICICI Bank attaches to the acquisition, it convened a board meeting on September 4, just one working day after the RBI announcement. ICICI Bank subsequently confirmed its interest, stating UWBÆs network ôcan be leveraged to grow ICICI BankÆs rural and small and medium enterprise banking operations in particular and its overall distribution franchise in general.ö

ICICI Bank is not alone in its thinking. It is facing competition from Canara Bank, Allahabad Bank, Andhra Bank and Federal Bank.

Canara Bank informed the Bombay Stock Exchange (ôBSEö) of its interest, highlighting ôthe network of branches and geographical contiguityö. Narkar agrees, drawing attention to the "synergies between Canara Bank's existing south, central and north India branch network and UWB's strong position in the west". Federal Bank (which earlier this year acquired lossmaking Ganesh Bank of Kurundwad) declared its interest and convened an emergency meeting of itsÆ board on September 6 to make an offer. Corporation Bank indicated it could be interested.

Indian banks are anxious to consolidate their positions and market share before 2009, following which the RBI has stated the playing field will be level for Indian banks and foreign players. Foreign banksÆ expansion in India is restricted by RBI control on branch rollout and takeovers. As a result, foreign banks account for less then 10% of total banking assets in India, a market which is perceived as being critical to their long term growth.

Analysts expect the transaction to be concluded at a price which is beneficial for the acquiring bank, reflected in the traded prices of shares on Monday. Shares of ICICI Bank went up 2% to close at Rs622. Federal Bank and Canara Bank also gained. In contrast UWBÆs shares plummeted 33%.
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