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The latest in the phase of consolidations in the Indian banking sector is the merger between HDFC Bank and the Centurion Bank of Punjab. This merger will make HDFC the 2nd largest private sector bank

The phase of consolidations has begun in the Indian banking sector. The announcement of the merger between the HDFC Bank and the Centurion Bank of Punjab is the latest case in point.

With this merger, the HDFC Bank will instantly get to increase its brand network by almost a half to around 1,200 branches and expand its asset base in the process as well. This has made HDFC Bank a serious contender to become the second largest player among the private sector banks in India. ICICI Bank holds the premier position in this sector. The second largest slot was challenged in recent years by Axis Bank, which has grown at a significantly faster rate than HDFC. However, this new transaction should now place HDFC comfortably in the second spot - a good 70 per cent ahead of its nearest competition, on assets and branch network.

HDFC Bank now also stands to gain from the increased penetration in the western, northern and southern markets of India, particularly the SME and agricultural sector where the Centurion Bank of Punjab has a strong presence. Centurion, through its merger with the Bank of Punjab in June 2005 has a strong presence, particularly in cash-rich Punjab, Haryana and north Rajasthan. In August 2006, it had merged the Kerala-based Lord Krishna Bank with itself, which gave it 110 branches in southern India.

HDFC Bank has approved the share swap ratio of 1 share (Re 1 each) for every 29 shares (Re 1 each) held in Centurion Bank of Punjab. HDFC Bank, which began operations in 1994, is 24 per cent owned by HDFC. In 2000, HDFC Bank took over private sector Times Bank and has a network of more than 754 branches spread across 263 cities. It also sources mortgages for its parent HDFC. HDFC Bank pays HDFC for credit appraisal and operations and receives a fee for sourcing. The bank has had a strong and steady growth over the past 10 years and continues to grow at more than 30 per cent. The current market capitalization of HDFC Bank is Rs 54,671 crore while that of Centurion Bank of Punjab is 10,685 crore (as on February 21, 2008).

Fee income is one of the major sources of revenue for banks, particularly through distributing/selling products like mutual funds, insurance, ULIPs, etc. Fee income contributed 46 per cent to the Centurion Bank of Punjab's total income for the December 2007 quarter.

Interestingly, the fee based income has become more crucial since lending, which is core to their business, has become difficult due to interest rate pressures. Should there be a fall in interest rates, it could provide a new trigger to banks, consequently making banking stocks attractive.

The activity in the banking sector would be interesting in 2009 with more possible mergers and acquisitions taking place.