The Hindu Business Line : Rehabilitation package for a bank is at best a short-term remedy

I don't think rehab packages ever work unless they are backed by the skills required to restructure and turn around a business, says Mr Abizer Diwanji, Head - Transaction Services, KPMG India.

Chennai , Sept. 7

The hottest issue in banking circles is UWB (United Western Bank), what with almost a dozen banks in the race to acquire the failed bank that is currently under a moratorium imposed by the Reserve Bank of India.

Mr Abizer Diwanji, Head - Transaction Services, KPMG India Private Ltd, Mumbai, answers a few questions from Business Line on the UWB issue, and sheds light.

What are the pluses and minuses that banks that are bidding for UWB have to consider?

The main attraction is UWB's branch network, especially in urban areas. The general impression about banking has moved away from interest-based impersonal banking to that of physical branch presence, which provides reach. More so, in SME (small and medium-sized enterprises) and retail, the largest focus areas. Since the RBI restricts banks from getting beyond a fixed number of branch licences each year, a bank acquisition would enable an acquirer to obtain the branches of the target.

Further, given that UWB is listed, it is also a good opportunity for unlisted banks to fold in and get surrogate listing. I am surprised that banks like DCB have not bid along with some private investors (even foreign, given that UWB is primarily locally held), who could pump in capital. This would achieve the purpose of reviving UWB as well as listing of banks, which is now mandatory over a period of time.

On the flip side, however, are the legacy operations of the banks and integration-related issues. Key, because SME default rates on a merger would generally be higher, even as depositor interests are protected. UWB may well be heading towards a rehab package or a valuation game, rather than just protecting depositors. It's about buying a franchise and paying shareholders for it, along with ensuring the interests of depositors.

Does a UWB rehab package run counter to the momentum in bank takeover market? Can a rehab dampen the interest of potential acquirers? Is rehab an alternative to the takeover route?

I don't think rehab packages ever work unless they are backed by the skills required to restructure and turn around a business. Take Centurion Bank, for example. Had it had a rescue package provided by a bunch of investors without the management expertise that Sabre brought along, it would at best have been a short-term measure. It is turning a loss into an opportunity, which is required, as against just providing capital to fill a deficit. I do think that accepting a rehab package would certainly be a remedy in the short term, but would not by itself enable a stable turnaround of the bank.

How far have recent bank mergers succeeded in India, and how does our performance rate in comparison to global experience? What are the lessons? Is overvaluation a frequent problem?

Bank mergers in India have largely been successful, thanks to the regulators' help in certain matters, and the sheer growth in the market. An industry that is polarised could only gain on consolidation if integration is done well. The growth of Centurion Bank, from a near defunct bank to a consolidator of three banks (viz. Centurion, Bank of Punjab and now LKB or Lord Krishna Bank), is a great example of such consolidation.

Public sector banks, on the other hand, do not need consolidation, as they have the size and the reach. Accordingly, mergers there may not yield any significant benefits, unless business models are different (as for example, ICICI Bank/ICICI Limited, and IDBI Limited/IDBI Bank).

As mergers in India have primarily been synergistic, to form universal banks or a private sector consolidator, M&A (mergers and acquisitions) in the banking sector is by and large a success story.

We do have forced mergers like GTB (Global Trust Bank) too, but I do believe the regulator had to do this, as a last resort.

Internationally, bank mergers to gain size have been disasters. JP Morgan and Chase Mahnattan, Citibank and Travellers etc. have not really created shareholder value, mainly due to larger cultural issues. Even the DBS-Dao Heng Bank merger has not been too synergistic. However, international banks are more global and hence, integration issues are far more complex. Emerging markets such as India have a higher success rate, given demand-supply mismatches.

Do voluntary mergers work better than forced mergers for banks? In a situation like what we have now, with competing candidates, what is the way out? An auction?

It is obvious that voluntary mergers are better than forced ones. In fact, forced mergers are always a compromise and hence, can never maximise shareholder value.

In most competing scenarios one needs to see what fits best and choose. Price-based auction is not a more advisable criterion than ability to integrate.

I believe that banks that are best able to integrate would any way offer the highest value as they would see maximum benefits from the branch network and franchise.

However, the prime consideration should be the ability to integrate.

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