The Hindu Business Line : `Look beyond the obvious, mine for the hidden jewels'

Even as there is speculation as to who would ultimately win over UWB (United Western Bank), it is time to `look beyond the obvious and mine for the hidden jewels,' says Mr Robin Roy, Principal Consultant, Banking and Financial Services, PricewaterhouseCoopers (P) Ltd. He takes on a few questions from Business Line.

What does the UWB episode highlight?

L'affaire UWB once again has brought to focus the pros and cons of bank mergers. The merger between Centurion Bank and Bank of Punjab some time back was expected to kickstart the expected wave of mergers and acquisitions in the Indian banking sector. The timing of the merger seemed to be just right, to benefit from the opportunities unfolding in the banking sector.

Are there any insights to draw from the Centurion case?

Yes, there were many firsts in that merger. It was a merger of conviction and not compulsion, a planned one, a strategic fit, and the coming together of two banks of similar parentage but different growth trajectories.

Does a planned merger derive benefits?

There is a potential for many advantages. For instance: Lower capital costs, reduction in marketing spend, saving on IT (information technology) and overheads, better marketing power, and complementarity in products and markets.

When a bank reaches a threshold, whereby it cannot `earn' itself out of trouble because of very high NPAs (non-performing assets), what are the alternatives?

Options are recapitalisation, restructuring and moratorium. The markets will nevertheless always look for a `non-regulatory' solution to a distressed bank. Such a solution can be a merger, takeover or acquisition, with shades of difference among them.

So, what could be the critical success factors for a `perfect marriage'?

Historically, two-thirds of all M&A (mergers and acquisitions) transactions fail to achieve intended strategic value. Numerous studies have found that the majority of acquisitions destroy, rather than create, shareholder value. Many companies fail to recapture pre-acquisition performance levels, despite efforts to increase revenue, reduce expenses and divest non-performing assets.

According to Mr Michael Porter, on an average, corporations subsequently divest more than 50 per cent of their acquisitions in new (related) industries and 74 per cent of their unrelated acquisitions.

Any positives that may help?

True, analysts will always love a number-driven approach. Studies have shown that the revenue streams from customers who are more then 10 years old have a declining trend. How about looking at the cost of acquiring a new customer versus acquiring a set of `ripe' customers, to whom you can cross-sell, up-sell or target, to get a larger share of the wallet?

On the number-crunching that takes place in a situation where a target like UWB lies on the table.

Calculations are done for ROA (return on asset), ROE (return on equity), NPA percentage, CAR (capital adequacy ratio) and NII (net interest income). These are all linked to revenue streams. The more potent numbers lie deeper. The depreciated assets in the nature of branches, the sunken costs of IT investments and the `intangible' investments in trained manpower are but a few.

Should we look at the replacement cost of a bank that goes under?

Yes, that cost would stare in the face when we are talking about a bank having 200 and odd branches. YES Bank, if you remember, the most recent bank to be set up, had to cough up a base capital of Rs 200 crore. It is quite possible, that in the post-Basel II environment, start-up capital for a bank could be even more. Even in a small country like Oman, with a total population of about 2.5 million, the start-up capital required by a bank is Omani Rials 50 million. This is almost Rs 600 crore!

What's your suggestion then?

Look for the latent value creating opportunities. It can range from revenue growth, to asset efficiency, to capital reduction.

More Stories on : Interview | Mergers & Acquisitions | Private Banks

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`Look beyond the obvious, mine for the hidden jewels'