Consolidation in the banking and financial services space gathered further momentum on Monday with IndusInd Bank saying it was exploring a merger with microfinance company Bharat Financial Inclusion (BFIL). The transaction — via a share swap — would create a combined entity with assets of about Rs 1.26 lakh crore and a customer base of about 1.7 crore. The merger will make BFIL a bank and give IndusInd a big priority sector portfolio of approximately Rs 9,631 crore and access to 68 lakh customers, many in the hinterland, to whom it can immediately sell a savings product and micro insurance.
IndusInd Bank MD and CEO Romesh Sobti confirmed there would be no cash outgo though he declined to comment on the share swap ratio except to say it would be decided by the respective boards. The markets are expecting a swap ratio of 1.5-1.75; on Monday, the IndusInd stock soared 5.56% to end at a record high of Rs 1,790.65, while the BFIL stock closed at Rs 967.25, up 3.34%. “If BFIL becomes a bank, its cost of funds will go down. Also, the risk weights for assets will come down since for an MFI, weights are100% while for a bank they are 25%. Margins will be accretive,” Sobti told a news channel.
Sobti indicated the exclusivity period could last for about a month. In the April-June quarter, the net interest margin for BFIL was 9.l%, compared with 4% for IndusInd Bank, while the capital adequacy ratio stood at 31.8% and 16.2%, respectively. IndusInd Bank’s total loans stood at Rs 1.16 lakh crore as of June 30, 2017, while BFIL’s non-Andhra Pradesh loan book stood at Rs 9,631 crore. BFIL has 1,408 branches and the bank has 1,210 branches.
“For IndusInd Bank, this potential merger would be synergistic, boost earnings (RoAs would cross the 2% mark) and prove to be a long-term positive, as it will have access to BFIL’s granular retail loan book, increasing cross-selling opportunities and scale benefits,” Edelweiss Securities said in a note. “Having said that, the bank’s MFI book would still be at about 10% of loans, which should be manageable.”
IndusInd Bank has a history of managing strong asset quality on the retail side, and MFI, despite being a risky portfolio, can be managed well by them, analysts said. “For BFIL, the pact entails elimination of political risks paving way for better leverage, no cap on lending rates and funding cost benefits,” Edelweiss Securities said. The cost of funds is likely to drop further from the 8.9% as of June 30, 2017. In the year-ago period, it was 9.9%.
“We will see more consolidation of banks with NBFCs/MFIs in the near future. Under such consolidation, the loan portfolio gets diversified with other lines of credit/lending coming into the fold, which could result into lending risks getting mitigated to a great extent. Besides the synergies arising in the running of consolidated business, there could also be a positive impact on the cost of funds, which directly relates to the overall profitability,” said Khushroo B Panthaky, director, Grant Thornton.
“The exclusivity agreement provides for a mutually agreed exclusivity period for due diligence and discussion to evaluate a potential strategic combination between the company and BFIL by way of amalgamation through a scheme of arrangement, or any other suitable structure,” IndusInd Bank said in a stock exchange notification.
Abizer Diwanji, head of financial services at EY, pointed out that if BFIL is simply merged into a bank, then the USP of BFIL may be lost. “The USP is that they are able to get better credit at a grassroot level. IndusInd Bank might consider converting BFIL’s outlets into a business correspondent and merging its balance sheet with the bank. The bank might first go for a merger with BFIL. Once this is done, they might consider de-merging the business correspondent. By merging the entities, you are retaining the low-cost model but you are giving it the balance sheet advantage by taking the assets and liabilities onto the bank’s books,” Diwanji said.
The potential transaction would be subject to due diligence, agreement on the appropriate transaction structure, definitive documentation, and board, shareholders’, regulatory, NCLT and other third-party approvals, as applicable.