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Monday, Dec 11, 2006

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Sangli takeover to be neutral on ICICI Bank

Radhika Kamath

The amalgamation of Sangli Bank with ICICI Bank has once again highlighted the role of old private sector banks in the consolidation exercise. The deal is likely to prove beneficial to the shareholders of the ailing Sangli Bank, by offering them an opportunity to participate in the growth of ICICI Bank's widely spread out operations.

For ICICI Bank, the merger would give it an immediate access to 198 branches of Sangli Bank, apart from strengthening its rural portfolio. However, unlike in some of the recent takeover deals in banking sector, it is difficult to figure out as to what synergies the merger is likely to result in. Most importantly, there is no clarity on the underlying logic for ICICI Bank to go for a takeover unlike in the case of IDBI's takeover of United Western Bank or Federal Bank's takeover of Ganesh Bank of Kurundwad.

Having obtained licence for opening 100 new branches, is there a real requirement to add about one-third branches? Further, ICICI Bank has, in the recent past, been talking about a non-branch model such as tie-ups with micro finance institutions and business correspondents to deliver credit to rural areas. If the bank is serious about such a strategy, then adding branches through inorganic route appears a little obscure.

This was however, not so in the case of UWB where there was a significant premium placed on the branch network while it also made a strategic fit with IDBI in terms of geography, deposit mix and credit profile. These elements appear to be missing largely in this case.

In terms of size, the takeover of Sangli Bank is likely to be insignificant for ICICI Bank. ICICI Bank has a deposit base of about Rs 1,90,000 crore, which is about 95 times that of Sangli. Its advances at about Rs 155,000 crore is close to 170 times that of Sangli. Sangli Bank has bad loans of about Rs 40 crore and Rs 60 crore in accumulated losses, which again is miniscule for a bank such as ICICI Bank.

It would, however, be interesting to watch as to how ICICI Bank would go about dealing with the 1,800-odd employees of Sangli Bank. Assuming no lay-offs, absorbing the entire workforce would mean an addition of about six per cent to ICICI Bank's employee-base. This is likely to push up wage costs and may turn out to be a tricky exercise.

From Sangli Bank's perspective, the amalgamation does hold a great deal of significance. The bank's financial health has been deteriorating since 2004. Failure on the part of the bank to infuse capital saw its capital adequacy ratio plummet to 1.6 per cent in March 2006 against the stipulated nine per cent. The bail out by ICICI Bank is likely to lend succour to the beleaguered bank. That the shareholders of Sangli Bank are getting one share of ICICI Bank for every 9.25 shares held by them is also a positive as they are likely to benefit from ICICI Bank's growth. Post-amalgamation, the equity base of ICICI Bank would expand by 0.4 per cent, which is unlikely to result in earnings dilution. On the whole, the impact of the exercise is going to be neutral for ICICI Bank.

Related Stories:
ICICI Bank board to take up Sangli Bank merger today

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