IDFC, Shriram Group Enter 90-Day Exclusive Merger Talks
No transaction has been finalised yet between IDFC and Shriram Group
Shriram Group and IDFC have entered into 90-day exclusive talks for a merger but no transaction has been finalised yet, Shriram Capital Chairman Ajay Piramal said in a media briefing on Saturday.
The boards of IDFC Bank Ltd., Shriram Transport Finance Company and Shriram City Union Finance Ltd. gave in-principle approval to the exclusive talks, the three entities said in separate stock exchange filings.
Approvals are needed from the Reserve Bank of India, Securities and Exchange Board of India, Insurance Regulatory and Development Authority, Competition Commission of India and the stock exchanges, for a merger to fructify, he added.
The proposed structure of the deal will be as follows:
- All operating businesses of both groups will come under IDFC
- Shriram City Union will be absorbed into bank
- Shriram Transport will remain as a standalone NBFC
- Shriram Transport will become a subsidiary of IDFC
- Life and general insurance businesses will also become subsidiaries of IDFC
- Shriram Transport Finance will be unlisted after the deal is completed
The full merger process between IDFC and Shriram Group is likely to take at least 12 months once the necessary approvals are in place, said Rajiv Lall, managing director and chief executive officer of IDFC Bank.
The intent behind the merger is to leverage the power of both brands going ahead, Lall added. “The physical reach of the bank will expand many folds with RBI having eased the branch expansion guidelines.”
The potential merger will create a financial conglomerate with a universal bank at the centre, Piramal said. Moreover, he said the cost of liabilities and funding will come down significantly.
IDFC Bank: Struggling For Scale
IDFC Bank was launched in October 2015 and was one of two entities granted a licence in the last round of private bank licencing. The other one being Bandhan Bank. Unlike Bandhan Bank, which decided to stick to the core business which it had established as a micro-lender, IDFC Bank has struggled to build a new identity.
At launch, IDFC Bank said it hoped to build a retail banking franchise driven by technology and also intended to focus on rural markets through its ‘Bharat Banking’ division.
Between October 2015 and March 2017, the bank has seen its advances rise from Rs 41,937 crore to Rs 49,402 crore, according to investor presentations available on its website. Gross non-performing loans as of March 2017 stood at 3 percent, down from 7 percent in the December 2016 quarter due to sale of bad loans to asset reconstruction companies.
IDFC Bank has managed to build a deposit base of Rs 40,208 crore. Low cost current account and savings account (CASA) deposits stand at Rs 2094 crore.
While the potential merger may help the bank build its asset base, its liability franchise may remain weak, said brokerage house Macquarie Research in a report released on Friday in response to speculation of a merger with Shriram Transport Finance and Shriram City Union Finance.
“IDFC Bank is in need of a solid liability franchise as they are struggling to establish that organically. Acquiring a NBFC will not give them that. It will give them assets and will increase the need of a bigger liability franchise,” said the report which termed the combination as a ‘merger of desperation and aspiration.’
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What Shriram Brings With It?
Shriram Transport Finance and Shriram City Union Finance, both promoted by Shriram Capital, have worked across diverse business verticals. While the former has focused on commercial vehicle finance and construction equipment finance, the latter has built its business around two-wheeler loans, gold loans and loans to small and medium enterprises.
Each of the businesses bring with them some inherent volatility.
Shriram Transport Finance, which has assets of Rs 7919 crore, had a gross non performing assets (NPA) ratio of 8 percent at the end of fiscal 2017 compared to 3 percent in fiscal 2015. A decline in the commercial vehicle business, which is often driven by private sector investment activity, has hurt the company.
Shriram City Union Finance has a larger asset size of Rs 23,132 crore as of March 2017. It had a gross NPA ratio of 6.73 percent as of March 2017. NBFCs, however, follow a different NPA recognition strategy compared to banks and mark down assets where payments have been delayed for 120 days. In the case of banks, a 90 day delay in repayment of dues leads to an asset being termed as non performing.
Bringing all these diverse businesses together in a workable mix will be the key challenge in making the potential merger work, said Nomura Global Markets Research in a report on Friday ahead of the formal announcement.
“The first challenge we see this for the merged entity will be top management bandwidth and ability to manage such diverse businesses, especially under IDFC Bank which has just started its transition from a wholesale-funded project financier to a universal bank,” said the Nomura report.
