Bank to take over Centurion Bank of Punjab stock deals

In Economic Times there was news on February 13 stating Centurion Bank was looking at a merger and HDFC Bank was one of institutions it was in talks with. Finally the biggest merger in Indian banking is going to take final shape. This is the second time after almost six years that these two banks are discussing a merger. Last time issue related valuation reasons was not worked out due to which the merger was put on hold but now the personal equation between the top brass of the two banks has been worked out.

HDFC Bank will take over Centurion Bank of Punjab (CBoP) in an all-stock deal. The bank board members are likely to meet on Saturday to discuss the merger proposal. The share-swap deal, worth over Rs 10,000 crore, may be worked around the current market price of Rs 57 a share of CBoP.

In the class structure order, the merged entity will still be way below India’s biggest private sector bank ICICI in terms of assets, but it will be significantly bigger than Axis Bank. On Wednesday, marathon meetings were held between the officials of both the banks with a leading investment banker to discuss the finer points.

HDFC Bank MD Aditya Puri, CBoP chief executive Shailendra Bhandari and CBoP chairman Rana Talwar are all ex-Citigroup bankers. Mr Bhandari was also a part of the core team that set up HDFC Bank in ‘94. Besides this, Citigroup is also the single biggest shareholder in HDFC - the mortgage giant and parent of HDFC Bank.

Mr Bhandari will be joining the board of the new bank while Rana Talwar is probable be its non-executive chairman. As per sources, the HDFC group has a more ambitious deal in mind: a three-way merger between Centurion, HDFC Bank and its promoter HDFC.

But, at present they have decided to go ahead with the merger of the two banks first, with RBI unwilling to relax the reserve requirements (like CRR and SLR).

The proposed HDFC Bank-Centurion merger will not only help the new bank in making its presence in states like Punjab, Haryana and Kerala, but also give some headroom for greater capital market lending - a business that HDFC Bank has perfected. Besides, it will help HDFC bank to step up its retail and SME assets.

On Wednesday the CBoP scrip moved up 14.4% to Rs 57.05 after a business news channel reported the “merger buzz” while HDFC Bank scrip rose marginally to close at Rs 1,542.90. Interestingly, the HDFC scrip slipped 3.75% to close at Rs 2,648.55.

In a message to the Bombay Stock Exchange, HDFC Bank said that “presently there is no such proposal for the consideration of the board of directors of the bank”, while CBoP said it would not like to comment on the matter.
The major shareholders in CBoP are Sabre Capital (3.48% stake), Bank Muscat (14.02%) and Kephinance Investment (Mauritius) (6.13%). HDFC has a 23.28% stake in HDFC Bank.

In 2003 as a part of the recapitalization, Centurion Bank had 13.5 crore warrants to Sabre Capital to be converted into a similar number of equity shares. The face value of these shares was at Re 1. There was a lock-in period for these shares. Due to which these shares were to be released at a 40:30:30 ratios at the end of three years, four year and five year starting from 2007. The conversion of these warrants will help Sabre to increase its share in the bank.

At present HDFC Bank has 754 branches and has received RBI permission for another 250. The addition of 394 branches of CBoP will help the bank overtake ICICI Bank in terms of branch presence. In the North, CBoP has 170 branches while HDFC Bank has around 250 while in the South, CBoP has 140 branches and HDFC Bank has 150.