Federal Bank has finally set the ball rolling by initiating the exercise for a possible merger with Thrissur-based Catholic Syrian Bank. Talks of a merger have been in the air for over a year now particularly after Federal Bank acquired 5% stake in privately-held CSB last year. The merger will create a formidable entity in Kerala’s banking sector with their combined balance sheet strength in excess of Rs 43,000 crore.

Federal, a Kerala-based private sector bank, has said that it has started financial due-diligence of CSB for a merger, according to its filing with the Bombay Stock Exchange. The board of Federal bank has approved the decision, the company said.

The stock price of Federal Bank touched a high of Rs 250.9, an increase of 2.4% as compared to its previous close during the early morning trade. Around noon, the share price had subsided and was trading at around Rs 246.

The development comes on the backdrop of new additions to the board of Catholic Syrian Bank (CSB). The three new directors appointed at the bank are reportedly in favour of the deal as against the previous directors, who were opposed to the merger. Federal Bank acquired a 5% stake in CSB last year from the Chawlas, an NRI family, which still owns well over 25% and is the single largest shareholder in the bank.

Three private equity funds had picked up a total of 14% stake in CSB for Rs 33 crore in 2007. AIF Capital (5%), Gartmore and Siguler Guff (4.5% each) had bought the stake at Rs 190 per share, while Federal acquired the stake at Rs 250-300 per share. Other major shareholders in CSB are local Thrissur companies which have a 12-13% stake, according to earlier reports.

The deal will give an exit to the Chawlas and the private equity investors. PE funds in India have till now made good exits from investments in banks. Some of these include Yes Bank (ChrysCapital, Citigroup Venture Capital and AIF), Centurion Bank of Punjab (Sabre Capital, India Value Fund, ICICI Venture, ChrysCapital) and UTI Bank (Actis), among others.

The combined entity of the banks will have an income of nearly Rs 1,700 crore and net profits in excess of Rs 150 crore. While Federal Bank had an income of Rs 1,016 and net profits of Rs 114 crore in FY09, the numbers for CSB stood at Rs 656 crore and Rs 37 crore, respectively. The branch network of combined entity will touch nearly a 1,000, with Federal's 612 branches and CSB's 363.

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