HDFC Bank Plans India's Biggest Banking Takeover (Update2)

Feb. 22 (Bloomberg) -- HDFC Bank Ltd., India's third- biggest by market value, plans to buy Centurion Bank of Punjab Ltd. in the nation's biggest financial sector takeover.

The boards of both banks will meet tomorrow to consider the plan, they said in separate filings to the Bombay Stock Exchange. Centurion, based in Mumbai, fell 1.1 percent today, valuing it at $2.6 billion, after both banks were non-committal on reports about the merger.

HDFC Bank would add 2.5 million customers at 393 branches, extending its reach before overseas lenders are allowed to buy local rivals. The central bank plans to lift curbs on Citigroup Inc. and HSBC Holdings Plc next year to spur competition in the world's fastest-growing major economy after China.

State Bank of India, ICICI Bank Ltd. and other lenders are seeking to grow rapidly before India reviews rules next year. The banks are competing for a larger market share in an economy that's estimated to grow 8.7 percent this financial year.

``A larger network and size is the key in tapping retail opportunities in lending and distribution of financial products,'' said Vishal Goyal, an analyst with Edelweiss Capital Ltd. in Mumbai. ``It will certainly help HDFC Bank to add almost 400 branches.''

The merged entity will have 1,165 branches, surpassing the 955 of ICICI Bank Ltd., the second-largest lender, according to their Web sites.

Fund Raising

HDFC Bank may raise as much as $1 billion to fund expansion overseas and plans to open offices in Bahrain, Hong Kong and London in a year.

State Bank of India, the nation's biggest bank by assets, is currently raising $4.2 billion selling shares to stakeholders to finance growth. ICICI Bank sold $5 billion of shares to local and overseas investors in June.

Both HDFC Bank and Centurion Bank got licenses in the mid- 1990s as part of the central bank's initiative to encourage so- called new-age banks that would operate efficiently with the latest technology to compete with global banks. HDFC Bank has almost 10 million customers, compared with Centurion's 2.5 million.

Centurion, rescued by 3.2 billion rupees of funds from buyout firm Sabre Capital Worldwide Inc. in 2003 after making losses because of bad loans, last week told investors it will meet earnings expectations for the fiscal year. This assurance was made after the Economic Times newspaper reported the bank lost money by investing in Reliance Power Ltd.'s share sale.

Reliance Power fell 17.2 percent in its debut on Feb.11.

IPO Investments

``We invest in IPOs as part of our normal treasury operations and we also invested in the Reliance Power IPO,'' Tarini Vaidya, country treasurer, Centurion Bank of Punjab, said in a release Feb. 14. ``Till date our cumulative investments in IPOs, including this IPO, have delivered profits.''

Bank of Muscat owns 14.02 percent of Centurion, which is headed by former Standard Chartered Plc Chief Executive Rana Talwar. The bank last year acquired Lord Krishna Bank and had earlier absorbed Bank of Punjab Ltd.

HDFC Bank fell 67.95 rupees, or 4.4 percent, to 1,474.95 in Mumbai trading today for a market value of 522 billion rupees ($13 billion), according to data compiled by Bloomberg.

To contact the reporters on this story: Sumit Sharma in Mumbai at sumitsharma@bloomberg.net; M.C. Govardhana Rangan in Mumbai at grangan@bloomberg.net.