HDFC Bank to acquire Centurion Bank in $2.4 billion share-swap deal

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The deal "is positive for HDFC Bank as it has become more difficult to set up branches and get talent," said Sandeep Sabharwal, who oversees $3.2 billion as chief investment officer at Mumbai-based J.M. Financial Mutual Fund. "However, shareholders of Centurion Bank could be disappointed as they expected a ratio of about 1:25."

Analysts say the merger will only help HDFC Bank increase earnings. Merrill Lynch analysts Rajeev Varma and Veekesh Gandhi, in a note said that the merger gives an opportunity for HDFC Bank to leverage Centurion Bank's deposit base and distribution more effectively.

"We reckon it could help potentially take return on equity to around 20 percent by FY10," the analysts said.

"The merger gives HDFC Bank on a platter a year plus of growth, and a 50 percent increase in its banking network. There are synergies the banks can benefit from - Centurion Bank has a strong presence in high-yielding retail loans, while HDFC Bank has been very good at raising low-cost deposits," said Shriram Iyer, head of research at the brokerage Edelweiss Capital.

"Integration will be a significant challenge, but we are confident of management's ability to deliver synergy benefits given track record and experience," said Credit Suisse in an analyst note. The merger will likely be dilutive to earnings in the 2009 fiscal year, but combining functions and economies of scale should drive returns on earnings and earnings per share accretion from the next year, it said.

The deal will help HDFC Bank stave off a challenge from Axis Bank (formerly UTI Bank), Citigroup analysts said in a report, which had grown significantly faster than HDFC Bank, "and done so profitably."

So far, the Indian banking sector has not seen many mergers unless mandated by the banking regulator.

Global Trust Bank, a private bank was merged with state-owned Oriental Bank of Commerce (OBC) in 2004, while United Western Bank was merged with the Industrial Development Bank of India (IDBI) in 2006.

The last merger in the Indian banking sector was between Bharat Overseas Bank and Indian Overseas Bank (IOB) in March 2007.

"Larger banks make stronger banks. Size and scale do matter in the banking space and this deal has not come as a surprise. Stricter capital adequacy norms with Basel II implementation could force more banks, especially several of them down south, to merge with bigger entities. Thus, consolidation in the banking sector should go on for a while," said Kamlesh Gandhi, country head (Investment Banking) at Religare.

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