The Hindu Business Line : Centurion-LKB merger: Stage set for consolidation

If Mr Rana Talwar manages to strike the deal to merge the Kerala-based Lord Krishna Bank (LKB) with his Centurion Bank of Punjab, it may just be the right trigger to push consolidation in the banking space.

The deal is likely to be carried out through a share-swap transaction with value pegged at about Rs 300 crore. At this price, LKB's valuation works out to about 1.8 times its net owned funds of about Rs 165 crore. On an average, old private sector banks are trading at a price to book ratio of about 1.5 times.

Exit Strategy

Though, valuation appears a little high, considering the turnaround of LKB and its healthy capital position, Centurion BoP could not have asked for a better deal. The acquisition cost is also attractive for Centurion Bank. While the price-to-book multiple for the acquisition works out to 1.8, the Centurion Bank stock trades at a price-to-book of three times. The acquisition would, thus, be cost-effective for Centurion Bank shareholders.

The promoters (Puris and Burmans), who together control about 70 per cent of the equity, have been under pressure from the RBI for quite some time to dilute their holdings.

This offers them an attractive exit strategy particularly on the back of heightened volatility in the capital market, which would have posed problems for the IPO proposed by the bank, this fiscal.

It may be recalled that Federal Bank's attempt to buy out LKB last year had failed due to differences on valuation. Federal Bank had agreed to offer about Rs 250 crore as consideration, but LKB was looking at a valuation between Rs 300 crore and Rs 330 crore.

For LKB, the merger is likely to offer cost benefits and improve profitability. LKB's profitability over the last few years has been poor.

A high-level of non-performing assets coupled with high cost of funds marred the profit growth of the bank. The picture is, however, slowly changing now.

The bank has managed a turnaround last fiscal with a profit after tax of about Rs 4 crore. Its average cost of funds has come down to about six per cent from 10 per cent couple of years ago. The bank can leverage on Centurion BoP's large low-cost deposit base to bring down its cost of funds.

For Centurion BoP, this would be the second merger after it acquired Bank of Punjab last year.

With a total branch network of about 250, Centurion BoP has a strong presence in the north and west. The bank boasts of high net interest margins in the banking industry owing to its greater exposure to high-yielding two-wheeler loans.

Geographical Presence

LKB has a network of 112 branches, close to 60 per cent of which are in Kerala. This would help Centurion BoP widen its geographical presence and expand its agricultural and SME portfolio.

This merger will not significantly dent Centurion BoP's capital funds position, as the capital adequacy ratio of LKB is healthy at 10.1 per cent.

LKB has a balance sheet size of about Rs 2,700 crore as against Centurion BoP's Rs 13,000 crore.

This acquisition will also make Centurion BoP's stock valuation look relatively more attractive as assets would be added to the balance sheet at a significantly lower multiple compared to the valuation of Centurion BoP.

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