UTI Bank-Global Trust merger -- Banking on repeat shows across sectors

S. Vaidya Nathan

TUNING in to reality and taking timely action is perhaps the aspect about the Global Trust Bank and UTI Bank merger that really stands out.

That there were would be mergers in the banking industry, especially involving new and/or old private sector banks, has been well known for quite some time now.

We have had HDFC-Times Bank and ICICI-Bank of Madura in the last two years -- the latter a couple of months ago. UTI Bank and Global Trust Bank were the next two in line and each could have bought out one or two private sector banks (old and/or new) comfortably and stayed as entities with the UTI and Global Trust tag separately.

This path would have made each one somewhat bigger but not big enough to stand out and grow in an environment where HDFC Bank and ICICI Bank, as also a few public sector banks, have a lot going for them. By getting together the UTI Bank and Global Trust Bank could carve out a meaningful place in an increasingly competitive scenario with narrowing spreads.

Selling out well: The fact that the two banks have seen the writing on the wall and got together speaks well of the management of the two companies. Global Trust Bank, in particular, may have found the going tough on a standalone basis since it is so strongly associated with an individual -- Mr Ramesh Gelli.

Institutional arrangements are better for the long term. Through this merger, this problem seems to have been sorted out. The shareholders of Global Trust Bank have been spared of any value erosion later and concerns over valuation now.

The decision to sell out when the going is good, and that too on a more or less equal footing, is something that not too many owners/managers of Indian companies have done so far. The Bank of Madura is one of few other cases where a clear and dispassionate decision was made. If only such a trend spreads across sectors, it could strengthen Corporate India and also add to the universe of competitive, investment worthy companies.

Merger's implications: At the ground level, some of the factors that could merit a close watch in the emerging scenario are:

*By getting together, the combined entity may be in a position to give HDFC Bank and ICICI Bank a run for their money. Interestingly, all three combined entities have sources of sizeable captive businesses and good services operations. All three also now have `size' -- a key factor for any financial entity to survive and grow.

*The merger places the three on an almost even keel, but subtle differences exist that could make for relative competitive edges in the medium- to long-term.

*At the outset, one aspect is clear. HDFC Bank's status as the preferred stock and its premium valuation over peers across the sector is unlikely to diminish. Nor would its edge in the banking and financial services business be blunted. Though size-wise, it is now a close call, the perception factor, the track record and the brand equity of HDFC Bank are likely to stand it in good stead. Also having absorbed Times Bank for some time now, it is quite likely that HDFC Bank is on the look-out for ways to scale up operations through acquisitions. So it may have an edge here.

The interesting angle: Perhaps an interesting factor that could merit a close watch as a key implication stemming from the merger is the underground realities and market perception of ICICI Bank and UTI Global Bank. The first factor that may come into play is the integration process involving the merger.

The very fact that UTI Bank and Global Trust Bank are new generation banks suggests that their integration process should be smoother. It should also mean that two lean and mean outfits merge. The employees and management would be used to working in the technology-heavy environment.

In contrast, ICICI Bank may have a tougher task on hand with the Bank of Madura. The latter is generally accepted as having good quality operations and its acquisition could bring benefits that go beyond reach and customer base. The entrenched brand equity of both may also be a plus.

But integration may be more time consuming and expensive given the different backgrounds. This is despite the fact that Bank of Madura has invested strongly in technology. But its workforce may be a different factor in terms of size and compatibility with ICICI Bank. This may mean ICICI Bank, even in its merged form, may have some catching up to do with the other two. When compared to the UTI Global combine, it may have an edge in terms of FD costs. This is because of the aggressive FD mobilisation strategy used by Global Trust Bank, which has generally offered higher rates on its FD programmes.

There is no doubt place for both -- ICICI Bank and UTI Global. But how both would square off may be a story that could an interesting post-merger scenario. The relative post-merger strengths may also have an influence on valuation of the two stocks. The presence of Mr Ramesh Gelli in the UTI Global Bank and its plans for insurance may create some vibrancy in the post-merger entity as well.

These are banking turf areas, but if Corporate India can gather the broader message of the need to sell businesses at the right time (wherever required) and not hesitate to go in for mergers of equals, then the ICICI Bank-Bank of Madura and Global Trust Bank-UTI Bank mergers may have done something significant that goes beyond their own respective plans in the banking sector.