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Merger Proposal

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Chirag Bablani

on 24 March 2014

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Transcript of Merger Proposal

National Bank of Abu Dhabi
Incorporated in 1969
125 Branches, 585 ATM’s
50th safest bank in the world
Safest bank in the UAE
Largest Bank in Abu Dhabi
Well diversified loan book
SWOT Analysis
ROE peaked in 2010 at the height of QE program
Suring up of balance sheet through low t-bill rates, reflects 246 bsp YoY ROE decrease
Immediate and trailing impact of real estate crash.
Decreased Coverage Ratio to Increase Net Profit
Increase CAR to prepare for future growth
EPS decrease due to low YoY Net Profit growth.
Strong capital position increase P/E despite decreasing profit.
High P/E illustrates low future growth prospects (mean revision theory)
Steady BVS decline on the back low retained earnings growth.
Incorporated as National Bank of Ras Al – Khaimah in 1974
34 branches country wide
Government of RAK 52.75% holding
SWOT Analysis
Overall downward trend in ROE.
2010 ROE growth due to lower impairment charge growth of 7%.
Slow interest income growth.
Declining interest expense for 2011 and 2012.
Declining Coverage Ratio, inline with benchmarks banks.
Window dressing of NPL’s, heavy write offs and back collections.

Negative investor sentiment
Stable EPS on the back off consistent yields
Decreasing P/E due to low profit growth prospects
Stable decline in BVS represented by proportionate growth in share capital and total equity.
Competitor Comparison
NBAD 2nd largest bank in terms of net loans
ENBD holds 40% exposure to sovereigns, NBAD 12%
RAK only 2% percent market share
RAK highest ROE despite high Cost – to income.
NBAD ranked 3rd (ROE) despite conservative lending policy
NBAD considered benchmark highest coverage ratio, lowest NPL’s.
RAK NPL ratio misrepresented (window dressing).
Low NPL and higher provisions earn NBAD safest bank in UAE.

P/E multiples in the UAE high
Implying low growth/strong earnings.
NBAD not overvalued by fundamentals (Implied P/E 16.31)
RAK Bank severely undervalued (Implied P/E 8.28)

Valuations based on EPS of over .5 a share
RAK & NBAD within the top 3 of EPS
NBAD highest industry P/B and BVS

Merger Rationale
Given the research and analysis conducted on both banks and comparable firms in the market, it is beneficial for NBAD to acquire RAK Bank. Recommendation is based prior to any valuation of either firm being completed.

Following are advantages/disadvantages for NBAD to merge/acquire RAK Bank:
Exposure to retail/consumer loans market
Higher yielding assets
Greater market share
Credit risk concentrate

65 bps increase in ‘YoA’, translating to 59 increase in ‘NIS’
Combined low interest expense Net Interest Margin increase by .62%
Increases primarily due to higher yielding RAK retail loans.

NBAD increased retail loans exposure from 7.04% to 16.04%
Growth largely not possible from organic growth.
Retail loan concentration might be considered to high.

13% Increased Coverage ratio, merging RAK’s provisions.
10 bps drop in NPL ratio
Frequent NPL write off may be concerning.
NPL ratio might be higher given NBAD recognition of NPL’s

Fair value of RAK Bank derived from a Forecasted DCF valuation.
5 year planning horizon where RAK could earn a greater than terminal growth,
Perpetual growth after the planning horizon; earn cost of capital less the terminal growth rate.
Cash flows were free cash flows to equity
Accounting for cash held as capital adequacy reserve.

• Market Value =
o Outstanding # of shares * Current Market Price of shares
 NBAD = 3,874,558 * 10.3 = 39,907,947
 RAK Bank =1,523,859 * 4.1 = 6,247,822

• Value of RAK Bank to NBAD (Fair value) = Current Market Value of RAK + Synergy
o = 15,806,036 = 6,247,822 + 9,558,214

• Cash/Stock Offer = Fair value of RAK * Percentage
o Cash offer = 15,806,036 *.5109 = 8,705,603
o Stock offer = 15,806,036 *.4891 = 7,730,433

• Value of NBAD & RAK (Merged) = Current Market Value of RAK + Current Market Value of NBAD + Synergy
o =39,907,947 + 6,247,822 + 9,558,214

• Net Present Value
o NPV (Cash Offer) = Fair Value of RAK Bank – acquisition cost (cash)
 = 15,806,036 – 8,075,603 = 7,730,433
o NPV (Stock Offer Based on Share Swap of 42% ) = Fair Value of RAK Bank – acquisition cost (stock)
 Fair Value of NBAD/per share = 14.95
 Fair Value of RAK/per share = 10.37
 Ratio of RAK shares to be swapped for NBAD = 10.37:14.95

• Percentage of total RAK share capital to be swapped for NBAD Shares = 10.37/(14.95+10.37) = 40.96%

• Acquisition Cost =((# of RAK Bank Shares outstanding * share swap percentage) + NBAD # of Shares o/s)/Value of NBAD after Stock Offer
o = ((1,523,859 * .4069)+ 3,874,558 )/55,713,984 = 7,703,433

• Merger premium per share = (Value of Merged firm/new # of shares o/s) – Current Market price
o = 55,713,984/4,498,772 – 10.3

• Value of NBAD after stock offer = Value of NBAD & RAK – acquisition cost
o = 55,713,984 – 0 = 55,713,984

• Goodwill = Fair Value of RAK Bank – total equity (book value)
o = 15,806,036 - 5,695,215

• Combined Earnings per share = combined earnings of merged company/ new # of shares in merged company
o = (3,653,800+1,402,799)/4,498,772 = 1.12

• Merged P/E ratio = new share price/ combined EPS
o = 12.38/1.12 = 11.02

Merged Balance Sheet
BID Letter
Estimated Value of RAK 15,806,036; based on the P/E ratio 11.27
42% Share Swap Ratio
624,214 Million Shares Issued
Value of Stock Offer - 7.7 Billion
Offer Letter
Merger Premium AED6.27/Share
153% premium over share price
Buying over 1,523,859 Shares
Defense Letter
Agreed Upon Price/Share AED 10.37
Valuation based on price to book multiple 2.78
Market Price to book multiple 1.10; Implied price to book multiple 3.76; Undervalued Share
Expected strengthened retail banking position
Key Terms
Yeild on Assets
Interest Earned as a % of Total Interest earning assets
Cost of Funds
Interest Paid as a % of total interest bearing liabilities
NPL Ratio
Impaired loans as a % of total loans
Coverage ratio
Loan Loss provision as a % of impaired loans
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