Expensive as the acquisition of Bank of Rajasthan (BoR) by ICICI Bank appears to be, the deal

could work for the acquirer, analysts say. However, integration will be the key word.

“The deal is expensive, but may be value accretive in the long term. The deal values BoR at a
90% premium to its current price and implies 2.9x price/ book, but on a price/ adjusted book
valuations are expensive at 5.6 times (Mar-09). However, the valuations based on price/ branch
(Rs 6.6 crore) and market cap/ deposits (20%) are at a discount to HDFC Bank’s acquisition of
Centurion Bank of Punjab (Rs 27.5 crore and 50%, respectively).

Therefore, we believe that it will be critical for ICICI to integrate BoR’s existing systems and
processes with its own and leverage on BoR’s branches,” Aashish Agarawl and Prakhar Sharma
of CLSA Asia-Pacific Markets said in a note to clients on Wednesday.

The deal is seen benefiting ICICI Bank in terms of an addition of about a quarter of its existing
branch network, which will in turn enhance its earning potentials, return on assets (RoA) and
return on equity (RoE). RoA tells us what earnings were generated from invested capital (assets),
while RoE measures a company’s profitability by revealing how much profit it generated with
the money shareholders invested.

ICICI Bank posted a net profit of Rs 4,025 crore for FY10 and its RoE stood at 7.80%. As on
December 31, BoR had a network of 463 branches. ICICI Bank’s network has 2,000 branches.

“The motive of merger clearly is related to the branch network. At 463 branches, BoR adds 23%
more branches, which otherwise could have taken up to two years to ramp up organically,”
Sachin Sheth and Todd Dunivant of HSBC Securities & Capital Markets wrote in a note.

The valuation at market capitalisation to branches seems high

because BoR owns a lot of its branches. But it still makes sense for ICICI Bank as they will be
saving on their capital expenditure required to set up branches.

“A branch even in northern suburbs of Mumbai could cost Rs 2.5 to 3 crore to own. An
anecdotal analysis of branch expansion by HDFC Bank and ICICI Bank shows that new branch
rollout would require investment of Rs 50 lakh to Rs 1 crore only if they are on leased premises,”
said Kashyap Jhaveri and Pradeep Agrawal of Emkay Global Financial Services.

The acquisition is expected to be an all-share deal. The proposed share swap ratio is 25:118 (or
1:4.72) swap ratio. DNA calculus shows that at the 25:118 (or 1:4.72) swap ratio, ICICI Bank
will issue about 3.42 crore new shares, which amounts to a 3.07% stake dilution, to fund the
deal.

“ICICI Bank appears amongst the better positioned banks to both capitalise on easing rates and is
also among the least vulnerable to the expected upturn in the non-performing loans cycle. The
return to growth could result in above 30% earnings growth in FY11-12, return on assets to over
1.6% from 1.1% in FY10 and return on equity at over 15% by FY12,” Rajeev Varma and
Veekesh Gandhi of Bank of America-Merrill Lynch wrote in a note.