Employees sit at the reception desk at Capital First Office in Mumbai, India. (Pgotographer: Anirudh Saligrama/BloombergQuint)

IDFC Bank, Capital First To Merge In Share Swap Deal

The boards of the IDFC Bank Ltd. and Capital First Ltd. today approved a merger between the two entities, creating a lender which will have a portfolio diversified across large corporate lending, small and medium enterprise loans and retail credit.

Shareholders of Capital First will get 139 shares of IDFC Bank for every 10 held, IDFC Bank said in a statement after its board meeting on Saturday. V Vaidyanathan, founder and executive chairman of Capital First will take over as the chief executive officer of the merged entity after all regulatory approvals.

Rajiv Lall, who is currently the CEO of IDFC Bank, will move into the role of executive chairman, replacing Veena Mankar, who will continue on the bank’s board. The board also appointed Bipin Gemani as interim chief financial officer of IDFC Bank. Gemani was previously the CFO of IDFC Ltd.

The deal comes after a failed bid by IDFC Bank, led by promoter IDFC Ltd., to merge with billionaire Ajay Piramal’s Shriram Capital. The bank, which started operations in October 2015, has been scouting for acquisition targets to boost its retail lending portfolio.

Post-merger, the combined entity of IDFC Bank and Capital First will have an AUM of Rs 88,000 crore, the bank said in its statement. The merged entity will have a distribution network comprising 194 branches (as per branch count of December 2017 of both entities), 353 dedicated banking correspondent outlets and over 9,100 micro ATM points.

The deal values Capital First at a 12 percent premium to its closing price on Friday on the National Stock, BloombergQuint’s calculations show. Promoter Warburg Pincus will hold about 10 percent in the merged entity from 36 percent in Capital First.

IDFC Bank, Capital First To Merge In Share Swap Deal

According to Asutosh Mishra, banking analyst at Reliance Securities Ltd., the merger ratio benefits Capital First more but in the medium to long term, IDFC Bank will be the bigger beneficiary. On Monday, the Capital First stock may see a bigger spike, he added.

So far, IDFC Bank’s loan book has been skewed toward infrastructure lending, which contributed 47.5 percent of its total loans as of Sept. 30. This is the loan book that the bank inherited from its parent IDFC Ltd. when it received a banking licence from the Reserve Bank of India in 2014.

In comparison, Capital First had a retail loan book of Rs 22,974 crore with a customer base of three million and a distribution network of about 228 centres. Capital First also has a healthier asset quality. Its gross non-performing loans ratio stood at 1.63 percent as on Sept. 30, 2017.

IDFC Bank has reduced its gross non performing loans ratio to 3.9 percent after it sold off a chunk of bad loans to asset reconstruction companies in March 2017.

IDFC Bank, Capital First To Merge In Share Swap Deal

For Capital First, this merger could spell a lower borrowing cost owing to the bank’s ability to garner current account savings account (CASA) deposits. Besides, it would also give the financing company an entry into large corporate and infrastructure lending.

“NIM (net interest margin) is basically going to get protected on the higher side. IDFC Bank tends to benefit as well since they do not have retail SME (small and medium enterprises) portfolio and this could lead to valuation improvement,” said Deven Choksey, managing director, KRChoksey Investment Managers Pvt Ltd.

IDFC Bank attempted to merge with the Shriram Group in a complex deal announced in July last year. Four months later, the two called off the merger after talks failed.

While Lall maintained that the deal had fallen through due to a lack of consensus on the swap ratio, R Thyagarajan, the chairman of the Shriram Group had said that there were other issues at play.

“The most important thing is how much value would be created for shareholders if a merger of this kind takes place. On that, there has to be an agreement... Then they should look at what shareholders will get in the period of two years... We have to see that how these strengths could be merged in such a manner that the idea that we have in terms of implementing value creation will take place...Finally, we go to the regulators. They should feel comfortable,” Thyagarajan had said in an interview with BloombergQuint.

IDFC Bank had then said its strategy to expand its retail business remained on track and it will continue to look for acquisitions to achieve that goal.