UWB to impact IDBI finance profile negatively as per S&P

In its rating update on proposed merger of United western bank with IDBI, S&P has maintained that the merger will not impact its rating outlook but at the same time will impact financial profile of IDBI negatively. Interesting the proposed merger where IDBI will pay Rs 28/- per share to UWB shareholders seems to benefit punters and traders heavily who are going to make more than 100% in this tradeoff and only people who have suffered are the poor depositors who were left to uncertainty due to sudden moratorium placed by RBI.  

Standard & Poor’s Ratings Services said today its ratings and outlook on Industrial Development Bank of India Ltd. (IDBI, BB+/Positive/B), a public sector bank, are not affected by the Indian central bank, Reserve Bank of India (RBI), clearing a merger proposal between United Western Bank Ltd. (UWB) and IDBI. RBI announced a moratorium on UWB on Sept. 2, 2006, and suspended its operations. The merger proposal requires IDBI to pay Indian rupee (Re) 28 (US$0.61) for each UWB share, amounting to a total of Re1.50 billion, and to assume the assets and liabilities of UWB according to the conditions in the proposal. This is the first instance in India where an acquirer bank, IDBI, is required to compensate the shareholders of a bank under moratorium. UWB’s branch network in the affluent western Maharashtra region in India and its wide depositor base is expected to boost IDBI’s distribution network and grow its retail portfolio. The Re1.50 billion purchase consideration will have a negligible impact on IDBI’s reported shareholders’ funds of Re66.59 billion as at March 31, 2006. Standard & Poor’s, however, expects UWB’s weaker asset quality to impact IDBI’s financial profile negatively. UWB’s loan quality and recovery from its Re40 billion loan portfolio is a concern, given its regulatory net NPL ratio of 5.66% as at March 31, 2006, is significantly above the peer group average of about 2%. Standard & Poor’s will continue to monitor the impact on IDBI’s financial profile.