An IDFC Bank-Shriram Merger? Will They? Should They?
If stock markets are to be believed, a plan is brewing at the headquarters of one of India’s youngest private sector lender - IDFC Bank. Shares of the bank have risen for three consecutive trading sessions with market analysts speculating that a merger with another financial services company may be on the cards. The Shriram group’s twin non-banking firms – Shriram Transport Finance and Shriram City Union Finance - are being cited as possible merger candidates.
A senior official at the Shriram Group told BloombergQuint, on the condition of anonymity, that they are open to the idea of a merger or an acquisition at the right place at the right time. The board of Shriram Capital is expected to meet on Saturday to explore strategic options available, this person said.
IDFC Bank, too, has a board meet scheduled for Saturday, an official at the lender told BloombergQuint without sharing details on the agenda for the board meet. This person said that IDFC Bank is in talks with more than one candidate.
Neither company has informed stock exchanges about the board meeting yet.
In response to a query from stock exchanges, IDFC Bank said it could neither confirm nor deny the news of merger talks with the Shriram Group. It, however, added that it continues to look at inorganic growth opportunities.
Indeed, inorganic expansion, particularly in the retail banking segment, is a stated strategy for the bank going by its annual report.
Acquisitions have been part of bank’s strategy to increase customer base...In personal banking, your Bank’s focus has been on rapidly increasing the retail share in total advances across all customer segments and pursuing cost-effective acquisition at scale, especially of mass affluent and mass retail customers for low cost deposit mobilisation.IDFC Bank Annual Report (2016-17)
Brokerages like CLSA believe that IDFC Bank trades at a significant discount to peers. One reason for this is that it needs to scale-up its banking franchise and improve its return on equity. If this is done, the bank’s stock can see a re-rating, said CLSA in a July report.
A Complex Cast Of Characters
A merger between IDFC Bank and Shriram Group firms, if it happens, will be anything but easy. Each entity brings with it a complex cast of characters.
Shriram Capital is the promoter entity for both Shriram Transport Finance and Shriram City Union Finance. However, Piramal Enterprises holds equity in all three. In Shriram Capital, Piramal holds 20 percent. South African firm Sanlam holds 26 percent in Shriram Capital while private equity firm TPG also holds equity in the holding company.
In the case of IDFC Bank, the promoter is the IDFC Financial Holding Company.
A three-way merger between IDFC Bank, Shriram Transport and Shriram City Union will mean rearranging all these shareholdings, particularly that of the Piramal Group.
When asked if the Piramals would be happy if the transaction with IDFC fructifies, the Shriram official quoted above said that he doesn’t see any problem in getting a third partner on board, provided it makes business sense.
A look at the business profiles of the three entities throws up synergies.
An IDFC Bank merger with Shriram Transport and Shriram City Union would enable the private bank to expand its branch network and its customer franchise. The loan books of the three entities are complementary rather than overlapping, which will strengthen the case for a merger.
Shriram Transport Finance is mostly in the business of commercial vehicle financing and construction equipment financing. Shriram City Union does small business financing and gold loans, along with offering other retail products. IDFC Bank, meantime, has an inherent strength in corporate lending but no meaningful presence in retail.
Even from a business cycle perspective, there could be some merit to a merger, said an analyst.
"Recent trends on new commercial vehicle sales indicate weak demand and the cyclical pain could last longer for Shriram Transport. A possible merger with IDFC Bank along with Shriram City Union would mitigate this," Dhruvesh Sanghvi, analyst at ProsperoTree, a boutique research firm based out of Mumbai, told BloombergQuint over the phone.
A merger of this nature would also bring with it regulatory complications. One of them will be reorganized shareholding. If any of the new shareholders brought on board IDFC Bank, post the merger, hold more than 5 percent, they will need to get clearance from the Reserve Bank of India (RBI). This may not prove to be a challenge since all the firms involved are RBI regulated.
The banking licence, however, would need to stay with IDFC Bank and cannot be transferred.
Also if two NBFCs are merged into the bank, the combined entity would need to bring in the capital required to meet the statutory liquidity ratio (SLR) and cash reserve ratio (CRR) that banks are required to hold.
Any insurance or asset management businesses would need to be operated separately from the bank.
Premium For Banking Licence?
Currently the shares of IDFC Bank trade at 1.4 times the price to book value based on FY19 earning estimates. On the other hand, shares of Shriram Transport Finance and Shriram City Union are trading at a price to book value of 1.74 times and 2.72 times respectively, based on estimates for FY19.
IDFC Bank has a market capitalisation of Rs 21,545 crore, according to BSE data. The market capitalisation of Shriram City Union Finance and Shriram Transport Finance is Rs 7644 crore and Rs 25,138 crore respectively.
A banker, who spoke to BloombergQuint on the condition of anonymity, said that IDFC Bank shareholders may get a premium to the existing price due to the banking licence it holds. Also since IDFC Bank trades at a discount to other private sector banks, there may be room for upside in its valuation.