A Shriram-IDFC Bank Merger Could Dilute The Bank’s Book Value
IDFC Bank’s book value could go down by 25-30 percent in the event of a merger.
A potential merger of IDFC Bank Ltd. with the Shriram Group's twin non-banking firms will lead to a reduction in the book value of the private sector bank, according to two foreign brokerages.
IDFC Bank’s book value will see a 25 percent dilution if a merger goes through, Nomura said in a research note on Friday. Macquarie Research sees the book value decline by around 30 percent.
However, both brokerages agree that a possible merger will be earnings accretive.
Difficult To Manage Diverse Businesses: Nomura
IDFC Bank is a more "urban-centric" wholesale business, while Shriram Transport Finance and Shriram City Union Finance are both rural focussed, indicating negligible business overlap, Nomura said in its note.
But the challenge for the lender lies in the ability of the top management to manage such diverse businesses under IDFC Bank, which transitioned into a universal bank only in 2015, the brokerage added.
The combined entity will have the benefit of a high yielding portfolio and future growth could be built around "low-risk transaction-oriented" business, Nomura said but cautioned that 65 percent of the combined loan book will be in low-growth segments.
It will be a struggle for the combined company to match growth of other retail private banks.Nomura Research
The "NBFC in a bank" model, Nomura said, which was successfully implemented by IndusInd Bank's takeover of Ashok Leyland Finance in 2005, might be hard to replicate since merged entity's balance sheet would be larger than that of IndusInd in 2005.
Lose-Lose Merger: Macquarie Research
According to Macquarie Research, a potential merger will be "very negative" for the shareholders of IDFC Bank and the two Shriram companies.
Shriram Transport Finance's return on equity will go down to 9 percent from 12 percent in the event of a merger, the brokerage said in a separate research note. "The ROEs are going to compress further than 9 percent with statutory appropriations and integration costs", it added.
The merger process will be "enormously complex" and the transition period may see competitors capture market share easily, further suppressing returns, the report said. Returns may also be corroded due to the burden of maintaining statutory liquidity ratio and cash reserve ratio as a bank.
In such a scenario, the Shriram Group will do well to stick to its used commercial vehicle lending since it is a niche business, Macquarie noted.
There are challenges involved in doing cash intensive businesses and recovery related businesses through the bank model.Macquarie Research