Sunday 24 February 2008

HDFC Bank Agrees to India's Biggest Banking Takeover

HDFC Bank Ltd., India's third-biggest by market value, agreed to buy Centurion Bank of Punjab Ltd. in the nation's biggest banking takeover to gain services and branches before foreign lenders are permitted to buy local ones.

The boards of both banks will meet on Feb. 25 to set the share-swap ratio, the Mumbai-based lenders said today in a joint statement. Centurion Bank, whose chairman is former Standard Chartered Plc chief executive Rana Talwar, has a market value of 106 billion rupees ($2.6 billion).

HDFC Bank will gain 2.5 million customers, mainly in the southern state of Kerala and northern one of Punjab, and units specializing in small and medium-sized business lending and auto loans. It wants to gain scale to compete with ICICI Bank Ltd., the nation's second-largest bank by market value, and prepare for the likely easing of rules governing foreign bank takeovers.

``A combination of HDFC Bank's strong financial position and the aggressive management team from Centurion Bank can be the right kind of competition to ICICI,'' said P.R. Dilip, managing director at Impetus Wealth Management, who owns HDFC Bank shares.

HDFC Bank's balance sheet stood at 1.3 trillion rupees at Dec. 31, up 47 percent from a year earlier. That's about five times larger than Centurion's, Macquarie Securities Ltd. analyst Seshadri Sen wrote in a note to clients on Feb. 14.

The merged company will have 1,148 branches, surpassing the 955 of ICICI. Assets, though, will be less than half ICICI's, according to Bloomberg calculations.

Earnings

HDFC Bank's net income rose 45 percent to 4.29 billion rupees in the fiscal third quarter ended Dec. 31, while Centurion Bank's rose 44 percent to 482.7 million rupees.

Centurion shares fell 1.1 percent yesterday to 56.4 rupees in Mumbai, after surging 14 percent on Feb. 21 amid newspaper reports about the merger. HDFC Bank fell 4.4 percent yesterday to 1,474.95, valuing the lender at 522 billion rupees.

Centurion shareholders may get 1 share of HDFC Bank, for every 27 or 28 shares in their company, the Economic Times newspaper said in a report today, without citing anyone.

State Bank of India Ltd., the nation's biggest lender by assets, ICICI and local rivals are vying for market share in an economy likely to expand 8.7 percent in the fiscal year ending March 31. The 200-year-old State Bank is planning to consolidate its seven units.

Banks Raise Funds

HDFC Bank, 23 percent held by the nation's biggest mortgage company, Housing Development Finance Corp., has said it may raise as much as $1 billion to fund expansion abroad and plans to open offices in Bahrain, Hong Kong and London in a year.

State Bank of India is raising $4.2 billion selling shares to stakeholders to finance growth. ICICI Bank sold $5 billion of shares to local and overseas investors in June 2007.

Both HDFC Bank and Centurion Bank got licenses in the mid- 1990s as part of a central bank initiative to encourage so-called new-age banks that would operate efficiently with the latest technology to compete with global banks. HDFC Bank has 10 million customers.

Centurion was rescued by Talwar's buyout firm Sabre Capital Worldwide Inc. in 2003, which bought a 48 percent stake for 3.2 billion rupees after loan losses led the bank to warn it was at risk of going out of business.

Centurion moved from a net loss of 1.1 billion rupees in the year that ended in March 2004 to net income of 1.2 billion rupees in March 2007.

Centurion's Acquisitions

Sabre's stake now stands at 3.5 percent, following dilution through mergers and capital restructuring. Bank Muscat SAOG, Oman's largest lender, owns 14 percent of Centurion, according to Bloomberg data.

Centurion bought Bank of Punjab Ltd. in January 2006 and Lord Krishna Bank last October.

Last week, Centurion told investors it will meet earnings expectations for this fiscal year. The company made the statement after the Economic Times reported the bank lost money by investing in Reliance Power Ltd.'s share sale.

Reliance Power fell 17 percent in its debut on Feb. 11 and the stock is now down 7.4 percent from its IPO price.

Mergers among Indian banks have largely been limited to those ordered by the central bank to rescue weak lenders.

Global Trust Bank Ltd., a failed non-state-owned bank, was merged with government-owned Oriental Bank of Commerce in 2004. United Western Bank combined with the Industrial Development Bank of India in 2006.

India's central bank next year will review rules to permit Citigroup Inc. and other overseas banks to buy local lenders.

Indian banks combined are worth less than half the value of the Industrial & Commercial Bank of China Ltd., the world's biggest, according to Bloomberg data.

HDFC Bank's purchase of Centurion must be approved by the central bank and shareholders, the two companies said today.