The Hindu Business Line : IDBI-UWB merger: A win-win deal

The shareholders of UWB could not have asked for a better price to exit. IDBI has offered to pay Rs 28 per share to the shareholders of UWB. This is at a 30 per cent premium to its current market price. At this price, the purchase consideration works out to about Rs 150 crore. For IDBI, the merger would mean access to the branch network of UWB - a key to support its balance sheet growth.

Branch network

IDBI, a late entrant in the race to take over the beleaguered UWB, has clearly emerged as a dark horse. With a balance sheet size of about Rs 81,733 crore, IDBI has been growing at about 25 per cent over the last few years. However, with a branch network of 181, the bank scores poorly when compared to its like-sized peers. The merger with UWB is likely to address this issue. What this means is that IDBI would get access to UWB's 230 branches, more importantly low-cost deposit base.

UWB's network presents a significant business opportunity in both the industrial and agricultural sector in terms of loan disbursal, trade finance, and also provides a base to garner low cost deposits. This has to be particularly viewed on the back of the current scenario where banks are finding it increasingly difficult to open new branches, thanks to the RBI's strict licensing norms. It is this that has placed a scarcity value on UWB's branch network.

Deposit base

The second aspect relates to the benefit of an improved deposit mix that the merger is likely to confer on IDBI. IDBI, which got converted into a commercial bank from a financial institution through a reverse merger in 2004, is still managing the transformation. About 60 per cent of its liabilities are in the form of long-term borrowings. This perhaps explains the reason for the high cost of funds for IDBI at about 6.5 per cent as against the industry average of about 5 per cent. With UWB in its fold, IDBI would get access to the deposit base, thereby enabling it to alter its borrowing mix in favour of deposits.

However, the success of the merger depends on the ability of IDBI to manage and contain the level of non-performing assets. UWB's net NPAs of about Rs 200 crore would increase its net NPAs to 1.4 per cent from about one per cent now. This has to be viewed on the back of UWB's rich exposure to the sugar sector, as sugar cycle appears to have peaked out of late.

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