The Hindu Business Line : Merger to create fast-growing, mid-size bank

In terms of market value, the combined capitalisation of IDBI and IDBI Bank at Rs 5,500 crore is now higher than that of all these banks barring Punjab National Bank.

The higher market value is attributable to the higher net worth of the combined entity.

At nearly Rs 8,000 crore, the net worth of the bank is only marginally smaller than that of ICICI Bank, the second largest bank in the country.

The combined profit of IDBI and IDBI Bank in the 12-month period ended March 2004 is, however, anomalously one-fourth that of ICICI Bank.

The restructuring of IDBI and its conversion into a universal bank, the incentives given by the Government and now the merger are steps taken to set right this anomaly.

What does the merger do for IDBI?

The merger increases the portfolio of clean advances for IDBI. IDBI is set to transfer Rs 9,000 crore of bad loans to a stressed assets stabilisation fund. The merger with IDBI Bank would bring in about Rs 9,000 crore of almost squeaky-clean assets. Overnight, IDBI's portfolio of about Rs 50,000 crore of assets, with bad loans of about 10 per cent, is transformed into a Rs 50,000 crore portfolio with virtually zero bad loans.

IDBI Bank's portfolio of assets and liabilities also earn better than that of IDBI. The merger would, therefore, increase the profitability of IDBI after merger.

IDBI Bank's network of 95 branches, 302 ATMs and nearly a million customers will come in handy for IDBI to scale up its retail banking business. Higher yielding retail advances would be less than 10 per cent of the total advances of the combined entity.

Similarly, low cost deposits - savings and current deposits - too would be less than 10 per cent of total deposits.

The combination of clean portfolio of advances and a scalable branch network is only the beginning.

IDBI will seek to utilise the advantages to increase the proportion of retail assets and liabilities.

That is necessary to enhance the profitability of the merged entity to levels comparable to that of its peers.

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Merger to create fast-growing, mid-size bank