Description
Indian Banking Industry
M&As in the Indian Banking Sector
M&As in the Indian Banking Sector
Presentation to
No part of this may be circulated, quoted, or reproduced for distribution without prior written approval from McKinsey
& Company. This material was used by McKinsey & Company during an oral presentation it is not a complete
record of the discussion.
2
KEY MESSAGES
! M&A in the Indian banking sector is an opportunity
and an imperative
! M&A has to be based on a business rationae and
e!!ective e"ecution # there is not enough track
record o! that in the Indian banking sector
! India may have to !oo$ a managed transition
mode to ensure a stronger banking sector
3
IMPE%A&I'ES ()% M&A ()% BA*KI*G I* I*+IA
! Intermediation costs remain high
! Access to ,uaity products and
services is restricted to a sma part o!
the market
! -hie sharehoders have had good
returns over the ast !e$ years.
vauations are $e short o! other
markets
Stabiity
%eturns to
sharehoders
Bene!its to
customers
/
0
1
! (ragmentation poses increasing risk in
the Indian banking sector
2omments
! &he banking sector is a big empoyer3
arge parts o! the $ork!orce may be e!t
$ithout re,uisite skis i! there is not
ski trans!er through M&A
'aue added
in the sector
4
4
/5 &6E%E IS SIG*I(I2A*& (%AGME*&A&I)* A*+ I*2%EASI*G
P)7A%ISA&I)* I* &6E SE2&)%5 5 5
Movement from "##$ to "##%
Market capitaisation 8%s crores9
&ource' (rowess team analysis
M)*C+ "##%
P:B
B)B
Bank
;&I
Bank
#
$
"
,
%
-
.
/
# -### $#### $-### "#### "-###
5
< A*+ 'A7;E IS M)'I*G A-AY &) (E-E% BA*KS
Biion
=5>
/>5?
/?51
@/5@
AA5@
A@54
>51 >5= >51
0/ isted banks
(er cent 01ear' $2234
%emainin
g banks
*e"t /?
banks
&op ?
banks
/>>BC 1.D/> 1D5/ 0AD
Share o!
assets
Share
o! PA&
Share o!
market
vaue
%s5
1D isted banks
(er cent 01ear' "##%4
%emainin
g banks
*e"t /?
banks
&op ?
banks
/>>B C /?.=D= /=A5?D /.//454?
Share o!
asset
Share
o! PA&
Share o!
market
vaue
%s5 Biion
/?51
/A5@
1=54
4=5@
4?5>
4/5?
1D5@
1=5/
005/
6
&6E -EAK*ESSES )( SMA77E% BA*KS A%E BEI*G EEP)SE+
7EA+I*G &) M;7&IP7E (AI7;%ES
Bank %eason !or !aiure Institutiona rootFcause
! Signi!icant e"posure to highF
risk midFmarket corporates
! )verFe"posure to capita
market operations
! Absence o! strong creditF
risk management systems
and processes
! -eak corporate governance
! 6igh eve o! *PAs arising
!rom e"tensive ending to
sma group o! cients
! -eak corporate governance
! 6igh *PAs !rom arge ending
to sma group o! cients
! 6igh e"posure to pantation
industry
! Absence o! strong creditF
risk management systems
and processes
! G%s5 />>> crore unsecured
oans to /@ customers
! 6igh invovement in payForder
scam
! -eak corporate
governance
Goba &rust Goba &rust
Bank Bank
Madhavpura Madhavpura
Mercantie 2oF Mercantie 2oF
operative Bank operative Bank
South Indian South Indian
2oFop Bank 2oFop Bank
*edungadi *edungadi
Bank Bank
7
05 I*+IA* BA*KS 6A'E );&PE%()%ME+ S6A%E I*+I2ES I* &6E 7AS&
(I'E YEA%S
&ota return to sharehoders 8Inde"ed to />> !or HanI@@9
(er cent
&ource' *56, e7cludes merger effect of 6C6C6 with 6C6C6 5an8
&%S 2AG%
9an:22
ug:#%
1>5>=B
405=B
=5?=B
@5A@B
0D544B
PS;
Banks
*e$
Private
Banks
Banking
Inde"
BSE 1>
inde"
)d
Private
8
6)-E'E%. 'A7;A&I)*S S&I77 %EMAI* 7)- %E7A&I'E &) )&6E%
MA%KE&S
2omparison across countries
P:E P:B
Bank vauation in India
P:EJ P:BJ
Germany
&haiand
;SA
6ong
Kong
Korea
BraKi
IndiaJ
*e$ private
sector banks
)d private
sector banks
Pubic sector
banks
< =eighted average of ,/ ban8s
&ource' (rowess 5loomberg
)ugust, "##%
3.#
%.3
,.%
$."
".,
"..
$./
$.-
$.$
$.,2<
"..
$.-
#.3
$-."
$%.$
$/./
2.#
3.$
3.-
../
9
15 +ESPI&E %E2E*& +E2%EASES. 2)S& )( I*&E%ME+IA&I)*
%EMAI*S 6IG6
< )verage leading rate less > change in =(6
&ource' ?6@ CM6?
%ea cost o! endingJ
(er cent
%ea cost o! ending. 0>>1
(er cent
India ;K ;S
/@@A /@@@ 0>>> 0>>/ 0>>0 0>>1 0>>4
)verage leading rate
=(6 for all commodities
*eal cost of loans to
borrowers
A5/>
051=
/5A>
/15>> /15>> /15>>
/05>> /05>>
//5?>
//5>>
454
?5@
151
D5/
15D
154
?54
10
2)MPA%IS)* -I&6I* &6E I*+IA* BA*KI*G SE2&)% %E'EA7S &6A&
2)*S)7I+A&I)* -I77 6E7P +%I'E +)-* I*&E%ME+IA&I)* 2)S&S
)perating cost:average assets
&op ?
*e"t />
%emaining
AvgJ 054?
PS;
Banks
054
05?0
05A=
< )verage for % years' A1 "###;"##,
&ource' *56, McKinsey analysis
&op ?
%emaining
AvgJ /5D@
Private
Sector
Banks
/5?@
/5A0
&op ?
%emaining
AvgJ 15>/
(oreign
Banks
05@/
15>1
11
(;%&6E%. 2)MPA%IS)* -I&6 G7)BA7 BA*KS I*+I2A&ES
&6A& (E- I*+IA* BA*KS 6A'E S2A7E 8/:09
B billion, ratio
$22/, "##% data
SiKeL Book 'aue o! 2ommon E,uity
P
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r
!
o
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m
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M
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< Mar8et value as of Aeb. $., "##% and Cec. ,$, $22/ boo8 value is as of fiscal year $22/ and for the latest available quarter for "##,
&ource' 5loomberg
"##%
$22/
0>
/>
4>
=>
&tandard
Chartered
*oyal 5an8 of &cotland
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May5an8
Ceutsche 5an8
@niCredito 6taliano
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5N( (aribas
&hinhan
Koo8min
C5& Droup
=oori Ainance
A>
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MN/1>bn
MN/A>bn
Citigroup
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More details on
ne7t page
MN/>>bn
MN@?bn
MN??bn
MN0=bn
/# $##
MN=>bn
MN1?bn
12
SiKeL Book 'aue o! 2ommon E,uity
P
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r
!
o
r
m
a
n
c
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L
M
a
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k
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t
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o
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k
%
a
t
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o
(;%&6E%. 2)MPA%IS)* -I&6 G7)BA7 BA*KS I*+I2A&ES
&6A& (E- I*+IA* BA*KS 6A'E S2A7E 80:09
B billion, ratio
$22/, "##% data
< Mar8et value as of Aeb. $., "##% and Cec. ,$, $22/ boo8 value is as of fiscal year $22/ and for the latest available quarter for "##,
<< Aundamentals for $22/ for &hinhan 5an8 and current for &hinhan Ainancial Droup
<<< Aundamentals for $22/ for =oori 5an8 and current for =oori Ainance +oldings
&ource' 5loomberg
MN0=bn
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=
/>
+ang &eng 5an8
May5an8
&hinhan Ainancial Droup<<<
Koo8min 5an8
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=oori<<<
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+ana 5an8
@E5
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#
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# - $#
&56
13
45 BA*KI*G SE2&)% 6AS BEE* )*E )( &6E KEY EMP7)YE%S I* &6E
)%GA*ISE+ SE2&)%
>5@?
/5/1
/544
/5=?
15/0
=544
Manu!acturing
&ransport storage O
communications
(inancing Insurance.
rea estate and
business services
Agricuture
2onstruction
Mining
*umber o! empoyees. 0>>/
Millions
015/AB
//500B
?5@4B
?5/=B
45>@B
1541B
B o! tota
Banking sector
8a S2Bs9 had a
$ork!orce o! >5@1
miion as on
1/:>1:0>>/. $hich
is ?DB o! tota
persons empoyed
in the !inancia
sector
14
>
>5/
>50
>51
>54
>5?
>5=
>5D
>5A
> ?> />> /?>
2ostJJJ
per
empoyee
&6E%E IS 6;GE +ISPA%I&Y I* EMP7)YEE ME&%I2S A2%)SS BA*KS
Someone in the
system needs to
take on the
PpainQ o! reF
skiing
empoyees ese
there may be a
big issue some
years do$n the
ine
BusinessJ per empoyeeJJ
< &um of deposits F advances << ?mployees for A1:#, <<< (ersonal cost
&ource' *56 65)
Empoyee productivity. 0>>4
*s million
$.-.
"#-
15
KEY MESSAGES
! M&A in the Indian banking sector is an opportunity
and an imperative
! M&A has to be based on a business rationae and
e!!ective e"ecution # there is not enough track
record o! that in the Indian banking sector
! India may have to !oo$ a managed transition
mode to ensure a stronger banking sector
16
7E'E%S )( 'A7;E I* M&A
2ost
savings
%evenue
enhanceF
ment
&reasury
improveF
ment
Product:
Segments
Geographies
2ost o! !unds
&rading income
2oections
Processes
+istribution
In!rastructure
I&
)perations
! Abiity to ,uicky centraise operations
! Abiity to upgrade overa technoogy
! Abiity to combine corporate:regiona in!rastructure
! Abiity to integrate and rationaise branches and other
channes
! Abiity to ma"imise the speed and recovery o! *P7s
! Abiity to redesign processes
! Abiity to upgrade product range and increase crossFse
! Abiity to ensure geographic gro$th and synergy
! Abiity to reduce cost o! !unds
! Abiity to everage scae and improve trading income
/
0
1
4
D
A
@
/>
?
=
Key source o! vaue !or the ac,uirer
17
&ource' McKinsey Corporate Ainance (ractice interviews
%ESEA%26 S6)-S &6A& I* M)S& 2ASES ME%GE%S (AI7 &) +E7I'E%
AGAI*S& &6EI% EEPE2&A&I)*S. -6A&E'E% &6E %A&I)*A7E
Poor dea
! ;nreaistic synergies
! Price too high
! 2ompetitor reactions
Good dea poory impemented
! Poor integration management
! (aiure to address cutura
di!!erences
! 2ustomer osses
! Poor communication
! Poor tracking
D>
1>
=>FD>B
!aied
18
=
/0
=1
D1
4/
7)& )( &6E ME%GE%S I* &6E %E2E*& PAS& 6A'E BEE*
&) BAI7 );& 7)- PE%()%MI*G BA*KS
Year Ac,uirer &arget &ota assets 8a!ter merger9 %easons !or merger
0>>> 6+(2 Bank &imes Bank ! Strategic reasons
0>>/ I2I2I Bank Bank o! Madura ! Strategic reasons
0>>0 Bank o!
Baroda
Benares
State Bank
! &arget bank $ith
negative net $orth
0>>1 PunRab
*ationa Bank
*edungadi
Bank
! 6igh accumuated
osses
! *et *PAs o! %s50>> crore
0>>4 )rienta Bank
o!
2ommerce
Goba &rust
Bank
! Bank !aiure
! *et$orth $iped out
@
/=
=4
D4
4A
)cquirer
Target
*s G### crore
19
2;%%E*& %EG;7A&I)*S 2);7+ P)SSIB7Y IMPE+E MA%KE&F
+%I'E* 2)*S)7I+A&I)*
! Sharehoding in any bank by a singe
entity or group o! reated entities imited
to /> per cent $ithout prior %BI approva
! A private sector bank can hod ony ?
percent shares in any other private
sector bank
! A !oreign bank $ith presence in India
can hod upto ? percent shares in any
other private bank
! (+I by singe entity or group o! reated
entities cannot e"ceed /> percent5
Individua (II investment cannot e"ceed
/> per cent $ith the aggregate imit !or
a (IIs restricted to 04 per cent 8that can
be raised to 4@ per cent $ith the
approva o! Board : Genera Body95
%ecent %BI o$nership guideines5 5 5
5 5 5 coud possibe impede
marketFdriven consoidation
&he ? per cent ceiing proposed
by the %BI is a maRor disincentive
!or !oreign banks $anting to buy
a stake in private sector banks5 5 5
6SB2. $hich recenty i!ted a /45D
per cent stake in ;&I Bank. $i
have to bring it do$n to ? B
&he ne$ guideines coud ater
the entire structure and
sharehoding patterns o! severa
private sector banks5 5 5 5 &his
$oud !orce I2I2I Bank. !or
e"ampe. to reduce its 0>544B
stake in (edera Bank and //5AB
stake in South Indian Bank5
20
S;MMA%Y
! M&A in the Indian banking sector is an opportunity
and an imperative
! M&A has to be based on a business rationae and
e!!ective e"ecution # there is not enough track
record o! that in the Indian banking sector
! India may have to !oo$ a managed transition
mode to ensure a stronger banking sector
21
Most appropriate !or India
A 2)*S2I);S 26)I2E 6AS &) BE MA+E ()% &6E PA&6 &)
MA*AGE 2)*S)7I+A&I)* I* I*+IA
P P(ree marketQ (ree marketQ
Key eements o!
restructuring
approach
Impact
0based
on e7perience of
other countries4
! Ao$ marketFdriven
consoidation
! Ao$ !ree entry o!
!oreign banks
! Signi!icant
consoidation o!
smaer payers
! *earFtota repacement
o! oca institutions by
!oreign banks
E"ampes ! Argentina
P PProtectionistQ ProtectionistQ
! (orce consoidation
8merger9 o! oca
banks
! 2ose:restrict market
access to !oreign
payers
! *o signi!icant
strengthening o! key
oca payers
! (oreign banks
continue to have
imited opportunities
! Maaysia
P PManaged Managed
transitionQ transitionQ
! Encourage domestic
ac,uisitions by strong
oca banks
! Seectivey open the
banking sector to
!oreign competition
! Increased dominance
o! 0F1 strong oca
payers through
ac,uisitions
! (oreign banks begin
to increase presence
! BraKi
22
ISS;ES A%);*+ E*+FS&A&E *EE+ &) BE %ES)7'E+ BE()%E
2)*SI+E%I*G A MA*AGE+ &%A*SI&I)*
+e!ine
overa bank
per!ormance
endFstate
+e!ine overa market endFstate structure
&he -ord 2ass Korean %etai
(inancia Services 2ompany
+e!ine
cost
management
endFstate
+e!ine
product
avaiabiity
endFstate
+esigning the endFstate
/
0 1 4
23
/5+E(I*E )'E%A77 MA%KE& E*+FS&A&E S&%;2&;%E
# (I*A*2IA7 S&%;2&;%E
*
u
m
b
e
r
o
!
p
a
y
e
r
s
MicroFmarket
niche payers
! 2ommunity banks
! 2redit unions
%egiona:nationa
payers
1F4
broadFbased.
goba payers
! ;niversa
banks
! *onFbanks
+e!ender:sma %eserve the
right to
pay:medium
Industry
shaper:arge
Strategy:market capitaiKation 8siKe9
24
BraKi Me"ico
6ungary Poand
KoreaJ &haiandJ
/@@> 0>>> /@@> 0>>>
/@@> 0>>> /@@> 0>>>
/@@> 0>>> /@@> 0>>>
+E(I*E EEPE2&E+ PA%&I2IPA&I)* 7E'E7S )(
()%EIG* BA*KS
(oreign o$nership o! banking assets. /@@>F0>>>
(er cent
South
America
Eastern
Europe
Asia
< $22# and $22% data
<< $22% and "### data
&ource' 56& McKinsey 8nowledge database press searches
A
D
India
/@@> 0>>1
S
0>>A
/
11
?
/0
1
D>
/>
=0
=
01
4A
T/
25
05 +E(I*E )'E%A77 BA*K PE%()%MA*2E E*+FS&A&E
2apita stabiity
2apita stabiity
Pro!itabiity
Pro!itabiity
Asset ,uaity
Asset ,uaity
2riteria Issues
! Appy internationa accounting standards to recogniKe a
embedded oan and investment osses and estimate the
rea BIS ratio o! banks
! Banks $i need to achieve an industry average %)A G /
percent and %)E around the />M/? percent range
through a greater pro!itabiity orientation
! Pricing margins !or maRor product groups shoud move
up
! BanksI *P7:tota oans ratios need to be /M0 percent
ma"imum. $hich is more in ine $ith the deveoped $ord
! Appy internationa accounting standards to identi!y the
rea *P7 ratio
! 2reate industryF$ide utiities to aid banks
?
?
?
26
15 +E(I*E 2)S& MA*AGEME*& E*+FS&A&E
Productivity o!
payment system
Productivity o!
payment system
Branch structure
!or retai deivery
Branch structure
!or retai deivery
! 2ost e!!iciency ratio o! banks shoud move to the 1>F
4>B percent range in ine $ith more deveoped
countries in a !e$ years through improving operationa
e!!ectiveness
! Banks shoud !ocus more on eectronic payment
system
! 2reate industryF$ide utiities to aid banks
! Improve branch productivity and reaign distribution
2riteria Issues
?
?
?
E!!iciency
E!!iciency
27
+E(I*E P%)+;2& A'AI7ABI7I&Y E*+ S&A&E
C)N)C) ?H)M(I?
&ource' )nnual reports team analysis
(rovided through affiliation
(rovided through subsidiary
(rovided through own operations
Persona
!inancia
services
8P(S9
Business
banking
Iife
Insurance
Meeting customer needs
%etai and
pension !und
management
J
J
J
J
J
J J J
J J
J
J
J
Banks
7i!e
insurance
*onFbank
trusts
2redit
unions
*o5 o! payers
4M= eading
banks. many
!oreign
banks
/0> 0>>O 1D 0141
2ustomer
needs being
met by a
variety o!
providers.
incuding 4F=
maRor banks
through
severa
products
and
channes
(roperty and casualty
Cisability
+ealth
(ensions
5ro8erage
*is8 management
6nvestment
Corporate finance
Credit
(ayment
(ayment
Credit
)sset accumulation
28
M&A.
P&A
M
&
)
,
(
&
)
S
ta
tu
s
,
u
o
2
h
o
o
s
e
&
!
o
c
u
s
M&A. P&A
M
&
A
.
P
&
A
I* A MA*AGE+ &%A*SI&I)*. I& IS IMP)%&A*& &) 2%EA&E
SMA77 *;MBE% )( *E-7Y EME%GE+ 7EA+I*G BA*KS
5)&?C EN
?H)M(I?& EA
ET+?* CE@NT*6?&
?7pected
(otential
Strong
-eek
2urrent (uture
Market
capitaiKation
&ime
Genera
payers
*iche payers
*iche banks
Stand aone
eading banks
*e$y emerged
eading banks
7i,uidate 7i,uidate
&ource' Team analysis
29
Potentia end stateS
! 1F4 arge universa
banks 8asset siKe
/?>.>>> crore pus9
! %egiona banks
8asset siKe D>.>>>
crore9
! (oreign banks
8asset siKe ?>.>>>
crore9
;#.-
#.#
#.-
$.#
$.-
".#
".-
,.#
,.-
%.#
# $#### "#### ,#### %#### -#### .#### /#### 3####
I
m
p
u
t
e
d
P
:
B
Asset siKe
&6E%E -);7+ BE (E-E% S&%)*GE% BA*KS I* &6E E*+ S&A&E
Stuck in
the midde
7arge *ationa
Banks
6igh
per!orming
banks
-eak: unviabe
banks
30
BA*KS I* EA26 )( &6E 2A&EG)%IES -);7+ *EE+ &) BE A*A7YSE+
I* +E&AI7 &) +E&E%MI*E &6E A2&;A7 PA&6
2ategory Imperative Key issues to resove
! Aggressivey increase
scae 8through
ac,uisitions9
! Shoud these banks !ocus on organic gro$th or
gro$th via ac,uisitionsS
! I! ac,uisitions. $hat are the right candidatesS
6igh per!orming
banks
! E"it
! Get ac,uired:merge
! Are the banks reay unviabe on a stand aone
basisS +o they have a set o! product market skis
or management $hich coud turn them aroundS
! I! $eak. shoud they be cosed or merged $ith
other banksS
! I! merged. shoud they be merged $ith another
$eak bank or a bank o! another categoryS
-eak banks
! Merge to !orm
regiona banks
! Get ac,uired by arge
nationa banks: $e
per!orming banks
! +o these banks have an opportunity to gro$
organicay into the arge nationa bank or $e
per!orming bank categoryS
! -hich ones coud serve as anchors to !orm
regiona banksS
! -hich ones are suited !or ac,uisitionS
Stuck in the
midde
! Ac,uire 8i! necessary9
other banks to
increase scae or
obtain access to ne$
skis
! Are these banks truy at a su!!icient scae or need
to merge $ith other arge banks to increase scaeS
! -hat banks o! other categories $oud make
sensibe ac,uisition candidatesS
7arge nationa
banks
31
E*+ )( P%ESE*&A&I)*
doc_941034303.ppt
Indian Banking Industry
M&As in the Indian Banking Sector
M&As in the Indian Banking Sector
Presentation to
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2
KEY MESSAGES
! M&A in the Indian banking sector is an opportunity
and an imperative
! M&A has to be based on a business rationae and
e!!ective e"ecution # there is not enough track
record o! that in the Indian banking sector
! India may have to !oo$ a managed transition
mode to ensure a stronger banking sector
3
IMPE%A&I'ES ()% M&A ()% BA*KI*G I* I*+IA
! Intermediation costs remain high
! Access to ,uaity products and
services is restricted to a sma part o!
the market
! -hie sharehoders have had good
returns over the ast !e$ years.
vauations are $e short o! other
markets
Stabiity
%eturns to
sharehoders
Bene!its to
customers
/
0
1
! (ragmentation poses increasing risk in
the Indian banking sector
2omments
! &he banking sector is a big empoyer3
arge parts o! the $ork!orce may be e!t
$ithout re,uisite skis i! there is not
ski trans!er through M&A
'aue added
in the sector
4
4
/5 &6E%E IS SIG*I(I2A*& (%AGME*&A&I)* A*+ I*2%EASI*G
P)7A%ISA&I)* I* &6E SE2&)%5 5 5
Movement from "##$ to "##%
Market capitaisation 8%s crores9
&ource' (rowess team analysis
M)*C+ "##%
P:B
B)B
Bank
;&I
Bank
#
$
"
,
%
-
.
/
# -### $#### $-### "#### "-###
5
< A*+ 'A7;E IS M)'I*G A-AY &) (E-E% BA*KS
Biion
=5>
/>5?
/?51
@/5@
AA5@
A@54
>51 >5= >51
0/ isted banks
(er cent 01ear' $2234
%emainin
g banks
*e"t /?
banks
&op ?
banks
/>>BC 1.D/> 1D5/ 0AD
Share o!
assets
Share
o! PA&
Share o!
market
vaue
%s5
1D isted banks
(er cent 01ear' "##%4
%emainin
g banks
*e"t /?
banks
&op ?
banks
/>>B C /?.=D= /=A5?D /.//454?
Share o!
asset
Share
o! PA&
Share o!
market
vaue
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/A5@
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4=5@
4?5>
4/5?
1D5@
1=5/
005/
6
&6E -EAK*ESSES )( SMA77E% BA*KS A%E BEI*G EEP)SE+
7EA+I*G &) M;7&IP7E (AI7;%ES
Bank %eason !or !aiure Institutiona rootFcause
! Signi!icant e"posure to highF
risk midFmarket corporates
! )verFe"posure to capita
market operations
! Absence o! strong creditF
risk management systems
and processes
! -eak corporate governance
! 6igh eve o! *PAs arising
!rom e"tensive ending to
sma group o! cients
! -eak corporate governance
! 6igh *PAs !rom arge ending
to sma group o! cients
! 6igh e"posure to pantation
industry
! Absence o! strong creditF
risk management systems
and processes
! G%s5 />>> crore unsecured
oans to /@ customers
! 6igh invovement in payForder
scam
! -eak corporate
governance
Goba &rust Goba &rust
Bank Bank
Madhavpura Madhavpura
Mercantie 2oF Mercantie 2oF
operative Bank operative Bank
South Indian South Indian
2oFop Bank 2oFop Bank
*edungadi *edungadi
Bank Bank
7
05 I*+IA* BA*KS 6A'E );&PE%()%ME+ S6A%E I*+I2ES I* &6E 7AS&
(I'E YEA%S
&ota return to sharehoders 8Inde"ed to />> !or HanI@@9
(er cent
&ource' *56, e7cludes merger effect of 6C6C6 with 6C6C6 5an8
&%S 2AG%
9an:22
ug:#%1>5>=B
405=B
=5?=B
@5A@B
0D544B
PS;
Banks
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Private
Banks
Banking
Inde"
BSE 1>
inde"
)d
Private
8
6)-E'E%. 'A7;A&I)*S S&I77 %EMAI* 7)- %E7A&I'E &) )&6E%
MA%KE&S
2omparison across countries
P:E P:B
Bank vauation in India
P:EJ P:BJ
Germany
&haiand
;SA
6ong
Kong
Korea
BraKi
IndiaJ
*e$ private
sector banks
)d private
sector banks
Pubic sector
banks
< =eighted average of ,/ ban8s
&ource' (rowess 5loomberg
)ugust, "##%
3.#
%.3
,.%
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".,
"..
$./
$.-
$.$
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$/./
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../
9
15 +ESPI&E %E2E*& +E2%EASES. 2)S& )( I*&E%ME+IA&I)*
%EMAI*S 6IG6
< )verage leading rate less > change in =(6
&ource' ?6@ CM6?
%ea cost o! endingJ
(er cent
%ea cost o! ending. 0>>1
(er cent
India ;K ;S
/@@A /@@@ 0>>> 0>>/ 0>>0 0>>1 0>>4
)verage leading rate
=(6 for all commodities
*eal cost of loans to
borrowers
A5/>
051=
/5A>
/15>> /15>> /15>>
/05>> /05>>
//5?>
//5>>
454
?5@
151
D5/
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154
?54
10
2)MPA%IS)* -I&6I* &6E I*+IA* BA*KI*G SE2&)% %E'EA7S &6A&
2)*S)7I+A&I)* -I77 6E7P +%I'E +)-* I*&E%ME+IA&I)* 2)S&S
)perating cost:average assets
&op ?
*e"t />
%emaining
AvgJ 054?
PS;
Banks
054
05?0
05A=
< )verage for % years' A1 "###;"##,
&ource' *56, McKinsey analysis
&op ?
%emaining
AvgJ /5D@
Private
Sector
Banks
/5?@
/5A0
&op ?
%emaining
AvgJ 15>/
(oreign
Banks
05@/
15>1
11
(;%&6E%. 2)MPA%IS)* -I&6 G7)BA7 BA*KS I*+I2A&ES
&6A& (E- I*+IA* BA*KS 6A'E S2A7E 8/:09
B billion, ratio
$22/, "##% data
SiKeL Book 'aue o! 2ommon E,uity
P
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Chartered
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=oori Ainance
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12
SiKeL Book 'aue o! 2ommon E,uity
P
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k
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(;%&6E%. 2)MPA%IS)* -I&6 G7)BA7 BA*KS I*+I2A&ES
&6A& (E- I*+IA* BA*KS 6A'E S2A7E 80:09
B billion, ratio
$22/, "##% data
< Mar8et value as of Aeb. $., "##% and Cec. ,$, $22/ boo8 value is as of fiscal year $22/ and for the latest available quarter for "##,
<< Aundamentals for $22/ for &hinhan 5an8 and current for &hinhan Ainancial Droup
<<< Aundamentals for $22/ for =oori 5an8 and current for =oori Ainance +oldings
&ource' 5loomberg
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13
45 BA*KI*G SE2&)% 6AS BEE* )*E )( &6E KEY EMP7)YE%S I* &6E
)%GA*ISE+ SE2&)%
>5@?
/5/1
/544
/5=?
15/0
=544
Manu!acturing
&ransport storage O
communications
(inancing Insurance.
rea estate and
business services
Agricuture
2onstruction
Mining
*umber o! empoyees. 0>>/
Millions
015/AB
//500B
?5@4B
?5/=B
45>@B
1541B
B o! tota
Banking sector
8a S2Bs9 had a
$ork!orce o! >5@1
miion as on
1/:>1:0>>/. $hich
is ?DB o! tota
persons empoyed
in the !inancia
sector
14
>
>5/
>50
>51
>54
>5?
>5=
>5D
>5A
> ?> />> /?>
2ostJJJ
per
empoyee
&6E%E IS 6;GE +ISPA%I&Y I* EMP7)YEE ME&%I2S A2%)SS BA*KS
Someone in the
system needs to
take on the
PpainQ o! reF
skiing
empoyees ese
there may be a
big issue some
years do$n the
ine
BusinessJ per empoyeeJJ
< &um of deposits F advances << ?mployees for A1:#, <<< (ersonal cost
&ource' *56 65)
Empoyee productivity. 0>>4
*s million
$.-.
"#-
15
KEY MESSAGES
! M&A in the Indian banking sector is an opportunity
and an imperative
! M&A has to be based on a business rationae and
e!!ective e"ecution # there is not enough track
record o! that in the Indian banking sector
! India may have to !oo$ a managed transition
mode to ensure a stronger banking sector
16
7E'E%S )( 'A7;E I* M&A
2ost
savings
%evenue
enhanceF
ment
&reasury
improveF
ment
Product:
Segments
Geographies
2ost o! !unds
&rading income
2oections
Processes
+istribution
In!rastructure
I&
)perations
! Abiity to ,uicky centraise operations
! Abiity to upgrade overa technoogy
! Abiity to combine corporate:regiona in!rastructure
! Abiity to integrate and rationaise branches and other
channes
! Abiity to ma"imise the speed and recovery o! *P7s
! Abiity to redesign processes
! Abiity to upgrade product range and increase crossFse
! Abiity to ensure geographic gro$th and synergy
! Abiity to reduce cost o! !unds
! Abiity to everage scae and improve trading income
/
0
1
4
D
A
@
/>
?
=
Key source o! vaue !or the ac,uirer
17
&ource' McKinsey Corporate Ainance (ractice interviews
%ESEA%26 S6)-S &6A& I* M)S& 2ASES ME%GE%S (AI7 &) +E7I'E%
AGAI*S& &6EI% EEPE2&A&I)*S. -6A&E'E% &6E %A&I)*A7E
Poor dea
! ;nreaistic synergies
! Price too high
! 2ompetitor reactions
Good dea poory impemented
! Poor integration management
! (aiure to address cutura
di!!erences
! 2ustomer osses
! Poor communication
! Poor tracking
D>
1>
=>FD>B
!aied
18
=
/0
=1
D1
4/
7)& )( &6E ME%GE%S I* &6E %E2E*& PAS& 6A'E BEE*
&) BAI7 );& 7)- PE%()%MI*G BA*KS
Year Ac,uirer &arget &ota assets 8a!ter merger9 %easons !or merger
0>>> 6+(2 Bank &imes Bank ! Strategic reasons
0>>/ I2I2I Bank Bank o! Madura ! Strategic reasons
0>>0 Bank o!
Baroda
Benares
State Bank
! &arget bank $ith
negative net $orth
0>>1 PunRab
*ationa Bank
*edungadi
Bank
! 6igh accumuated
osses
! *et *PAs o! %s50>> crore
0>>4 )rienta Bank
o!
2ommerce
Goba &rust
Bank
! Bank !aiure
! *et$orth $iped out
@
/=
=4
D4
4A
)cquirer
Target
*s G### crore
19
2;%%E*& %EG;7A&I)*S 2);7+ P)SSIB7Y IMPE+E MA%KE&F
+%I'E* 2)*S)7I+A&I)*
! Sharehoding in any bank by a singe
entity or group o! reated entities imited
to /> per cent $ithout prior %BI approva
! A private sector bank can hod ony ?
percent shares in any other private
sector bank
! A !oreign bank $ith presence in India
can hod upto ? percent shares in any
other private bank
! (+I by singe entity or group o! reated
entities cannot e"ceed /> percent5
Individua (II investment cannot e"ceed
/> per cent $ith the aggregate imit !or
a (IIs restricted to 04 per cent 8that can
be raised to 4@ per cent $ith the
approva o! Board : Genera Body95
%ecent %BI o$nership guideines5 5 5
5 5 5 coud possibe impede
marketFdriven consoidation
&he ? per cent ceiing proposed
by the %BI is a maRor disincentive
!or !oreign banks $anting to buy
a stake in private sector banks5 5 5
6SB2. $hich recenty i!ted a /45D
per cent stake in ;&I Bank. $i
have to bring it do$n to ? B
&he ne$ guideines coud ater
the entire structure and
sharehoding patterns o! severa
private sector banks5 5 5 5 &his
$oud !orce I2I2I Bank. !or
e"ampe. to reduce its 0>544B
stake in (edera Bank and //5AB
stake in South Indian Bank5
20
S;MMA%Y
! M&A in the Indian banking sector is an opportunity
and an imperative
! M&A has to be based on a business rationae and
e!!ective e"ecution # there is not enough track
record o! that in the Indian banking sector
! India may have to !oo$ a managed transition
mode to ensure a stronger banking sector
21
Most appropriate !or India
A 2)*S2I);S 26)I2E 6AS &) BE MA+E ()% &6E PA&6 &)
MA*AGE 2)*S)7I+A&I)* I* I*+IA
P P(ree marketQ (ree marketQ
Key eements o!
restructuring
approach
Impact
0based
on e7perience of
other countries4
! Ao$ marketFdriven
consoidation
! Ao$ !ree entry o!
!oreign banks
! Signi!icant
consoidation o!
smaer payers
! *earFtota repacement
o! oca institutions by
!oreign banks
E"ampes ! Argentina
P PProtectionistQ ProtectionistQ
! (orce consoidation
8merger9 o! oca
banks
! 2ose:restrict market
access to !oreign
payers
! *o signi!icant
strengthening o! key
oca payers
! (oreign banks
continue to have
imited opportunities
! Maaysia
P PManaged Managed
transitionQ transitionQ
! Encourage domestic
ac,uisitions by strong
oca banks
! Seectivey open the
banking sector to
!oreign competition
! Increased dominance
o! 0F1 strong oca
payers through
ac,uisitions
! (oreign banks begin
to increase presence
! BraKi
22
ISS;ES A%);*+ E*+FS&A&E *EE+ &) BE %ES)7'E+ BE()%E
2)*SI+E%I*G A MA*AGE+ &%A*SI&I)*
+e!ine
overa bank
per!ormance
endFstate
+e!ine overa market endFstate structure
&he -ord 2ass Korean %etai
(inancia Services 2ompany
+e!ine
cost
management
endFstate
+e!ine
product
avaiabiity
endFstate
+esigning the endFstate
/
0 1 4
23
/5+E(I*E )'E%A77 MA%KE& E*+FS&A&E S&%;2&;%E
# (I*A*2IA7 S&%;2&;%E
*
u
m
b
e
r
o
!
p
a
y
e
r
s
MicroFmarket
niche payers
! 2ommunity banks
! 2redit unions
%egiona:nationa
payers
1F4
broadFbased.
goba payers
! ;niversa
banks
! *onFbanks
+e!ender:sma %eserve the
right to
pay:medium
Industry
shaper:arge
Strategy:market capitaiKation 8siKe9
24
BraKi Me"ico
6ungary Poand
KoreaJ &haiandJ
/@@> 0>>> /@@> 0>>>
/@@> 0>>> /@@> 0>>>
/@@> 0>>> /@@> 0>>>
+E(I*E EEPE2&E+ PA%&I2IPA&I)* 7E'E7S )(
()%EIG* BA*KS
(oreign o$nership o! banking assets. /@@>F0>>>
(er cent
South
America
Eastern
Europe
Asia
< $22# and $22% data
<< $22% and "### data
&ource' 56& McKinsey 8nowledge database press searches
A
D
India
/@@> 0>>1
S
0>>A
/
11
?
/0
1
D>
/>
=0
=
01
4A
T/
25
05 +E(I*E )'E%A77 BA*K PE%()%MA*2E E*+FS&A&E
2apita stabiity
2apita stabiity
Pro!itabiity
Pro!itabiity
Asset ,uaity
Asset ,uaity
2riteria Issues
! Appy internationa accounting standards to recogniKe a
embedded oan and investment osses and estimate the
rea BIS ratio o! banks
! Banks $i need to achieve an industry average %)A G /
percent and %)E around the />M/? percent range
through a greater pro!itabiity orientation
! Pricing margins !or maRor product groups shoud move
up
! BanksI *P7:tota oans ratios need to be /M0 percent
ma"imum. $hich is more in ine $ith the deveoped $ord
! Appy internationa accounting standards to identi!y the
rea *P7 ratio
! 2reate industryF$ide utiities to aid banks
?
?
?
26
15 +E(I*E 2)S& MA*AGEME*& E*+FS&A&E
Productivity o!
payment system
Productivity o!
payment system
Branch structure
!or retai deivery
Branch structure
!or retai deivery
! 2ost e!!iciency ratio o! banks shoud move to the 1>F
4>B percent range in ine $ith more deveoped
countries in a !e$ years through improving operationa
e!!ectiveness
! Banks shoud !ocus more on eectronic payment
system
! 2reate industryF$ide utiities to aid banks
! Improve branch productivity and reaign distribution
2riteria Issues
?
?
?
E!!iciency
E!!iciency
27
+E(I*E P%)+;2& A'AI7ABI7I&Y E*+ S&A&E
C)N)C) ?H)M(I?
&ource' )nnual reports team analysis
(rovided through affiliation
(rovided through subsidiary
(rovided through own operations
Persona
!inancia
services
8P(S9
Business
banking
Iife
Insurance
Meeting customer needs
%etai and
pension !und
management
J
J
J
J
J
J J J
J J
J
J
J
Banks
7i!e
insurance
*onFbank
trusts
2redit
unions
*o5 o! payers
4M= eading
banks. many
!oreign
banks
/0> 0>>O 1D 0141
2ustomer
needs being
met by a
variety o!
providers.
incuding 4F=
maRor banks
through
severa
products
and
channes
(roperty and casualty
Cisability
+ealth
(ensions
5ro8erage
*is8 management
6nvestment
Corporate finance
Credit
(ayment
(ayment
Credit
)sset accumulation
28
M&A.
P&A
M
&
)
,
(
&
)
S
ta
tu
s
,
u
o
2
h
o
o
s
e
&
!
o
c
u
s
M&A. P&A
M
&
A
.
P
&
A
I* A MA*AGE+ &%A*SI&I)*. I& IS IMP)%&A*& &) 2%EA&E
SMA77 *;MBE% )( *E-7Y EME%GE+ 7EA+I*G BA*KS
5)&?C EN
?H)M(I?& EA
ET+?* CE@NT*6?&
?7pected
(otential
Strong
-eek
2urrent (uture
Market
capitaiKation
&ime
Genera
payers
*iche payers
*iche banks
Stand aone
eading banks
*e$y emerged
eading banks
7i,uidate 7i,uidate
&ource' Team analysis
29
Potentia end stateS
! 1F4 arge universa
banks 8asset siKe
/?>.>>> crore pus9
! %egiona banks
8asset siKe D>.>>>
crore9
! (oreign banks
8asset siKe ?>.>>>
crore9
;#.-
#.#
#.-
$.#
$.-
".#
".-
,.#
,.-
%.#
# $#### "#### ,#### %#### -#### .#### /#### 3####
I
m
p
u
t
e
d
P
:
B
Asset siKe
&6E%E -);7+ BE (E-E% S&%)*GE% BA*KS I* &6E E*+ S&A&E
Stuck in
the midde
7arge *ationa
Banks
6igh
per!orming
banks
-eak: unviabe
banks
30
BA*KS I* EA26 )( &6E 2A&EG)%IES -);7+ *EE+ &) BE A*A7YSE+
I* +E&AI7 &) +E&E%MI*E &6E A2&;A7 PA&6
2ategory Imperative Key issues to resove
! Aggressivey increase
scae 8through
ac,uisitions9
! Shoud these banks !ocus on organic gro$th or
gro$th via ac,uisitionsS
! I! ac,uisitions. $hat are the right candidatesS
6igh per!orming
banks
! E"it
! Get ac,uired:merge
! Are the banks reay unviabe on a stand aone
basisS +o they have a set o! product market skis
or management $hich coud turn them aroundS
! I! $eak. shoud they be cosed or merged $ith
other banksS
! I! merged. shoud they be merged $ith another
$eak bank or a bank o! another categoryS
-eak banks
! Merge to !orm
regiona banks
! Get ac,uired by arge
nationa banks: $e
per!orming banks
! +o these banks have an opportunity to gro$
organicay into the arge nationa bank or $e
per!orming bank categoryS
! -hich ones coud serve as anchors to !orm
regiona banksS
! -hich ones are suited !or ac,uisitionS
Stuck in the
midde
! Ac,uire 8i! necessary9
other banks to
increase scae or
obtain access to ne$
skis
! Are these banks truy at a su!!icient scae or need
to merge $ith other arge banks to increase scaeS
! -hat banks o! other categories $oud make
sensibe ac,uisition candidatesS
7arge nationa
banks
31
E*+ )( P%ESE*&A&I)*
doc_941034303.ppt