The merger of Bharat Financial Inclusion with IndusInd Bank could turn out to be profitable for the bank, said brokerages, a day after the lender and the micro-finance company announced signing of an exclusivity agreement on a possible merger.
Brokerages have also maintained their stance on IndusInd Bank stock. The deal will likely Bharat Financial at about $2.2 billion, according to a Bloomberg News report.
Here’s what brokerages said on the merger talks:
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CLSA On The Potential Merger
- Benefits for Bharat Financial Shareholders: Lower regulatory risk and funding costs.
- Benefits for IndusInd Post Merger: Ability to leverage Bharat FInancial’s Tier I CAR of above 30 percent (also capital release) and PSLC fees.
- The impact on IndusInd Bank’s earnings depends on the pace of normalisation of business for Bharat Financial.
- There could be some rise in IndusInd’s asset-risk profile post-merger as the share of micro-finance company rises to 8 percent of loans.
- Post-merger, we expect consolidated RoAs and RoEs to be 2.1 percent and 19.0 percent respectively.
- The deal is also expected to improve the common equity tier 1 ratio to about 15.5 from 14 percent currently.
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On IndusInd Bank
Motilal Oswal
- The IndusInd Bank- Bharat Financial merger will create the most profitable universal bank.
- Bharat Financial can generate higher return on equity.
- The merger, if successful, will add about 6.6 percent to IndusInd Bank’s existing loans and about 6 percent to its balance sheet.
- Post-merger, the share of retail will increase to about 47 percent.
- The potential acquisition of Bharat Financial will bring along a strong sales force network and supporting technology infrastructure.
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JP Morgan
- Stock Rating: Maintain ‘Overweight’.
- Target Price: Hiked to Rs 1,975 from Rs 1,675.
- Acquisition accretive with some near-term integration risks.
- The merger will give IndusInd Bank, a firm footing in micro-finance segment.
- Expect IndusInd Bank will enhance Bharat Financial's profitability via lower COF, better operational discipline and, over time, cross-selling.
- With about 6 percent move in IndusInd Bank on Monday (Nifty +0.7 percent), it seems to indicate that the market is looking for the short-term risks.
Macquarie
- Stock Rating: Maintain ‘Outperform’.
- Target Price: Unchanged at Rs 1,625.
- Expect 9 basis points and 95 basis points improvement in steady state Return on assets and Return on equity respectively, on the back of this acquisition for IndusInd Bank.
- Micro-finance institutions loans would comprise 9.7 percent of post-merger IndusInd Bank advances.
- Will not expect a boost to CASA ratio from the merger.
- Lower cost of funds, lower operating costs, better capital efficiency and higher leverage are key synergy benefits.
UBS
- Stock Rating: Maintain ‘Neutral’.
- Target Price: Unchanged at Rs 1,800.
- IndusInd merger with Bharat Financial could be EPS accretive by FY19-20.
- Microfinance to generate high ROEs for IndusInd Bank; Expect Tier I ROE to increase by 75 basis points.
- IndusInd's EPS post-merger to increase by 1 percent and 5 percent in FY19 and FY20 respectively, assuming swap ratio of 0.67 and funds savings of 125 basis points in FY19/20.
- Net interest margins to be higher by 40-45 basis points in FY19-20 estimates to 4.4-4.5 percent.
Deutsche Bank
- Stock Rating: Maintain ‘Buy’.
- Target Price: Unchanged at Rs 1,850.
- Long-term positive for IndusInd Bank.
- Value, earnings accretive by FY19.
- IndusInd Bank becomes a dominant player in the micro-finance space with the merger.
- Micro-finance business under a bank setup will be more profitable.
- Better MFI prospects, lower funding cost, and better leverage are the key benefits for IndusInd Bank.
IDFC
- Expected swap ratio of 1.6-1.7 Bharat Financial shares for 1 share of IndusInd Bank.
- We believe that the investors can play the short-term merger upside through Bharat Financial which potentially has more merger-related upside compared to IndusInd Bank.
- Higher growth, lower funding cost for Bharat Financial assets, offering deposits to Bharat Financial customers, front loaded provisions in Bharat Financial are the key positives.
- Expect funding cost to fall by 80-100 basis points.
- Merger to add 6 percent to loans, 9 percent to assets under management and around 40 basis points to gross NIMs.
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