Does everyone win in IndusInd Bank-Bharat Financial deal?


IndusInd Bank Ltd shareholders are a happy lot, considering the stock has surged an impressive 23.5% so far in the current fiscal year (FY18), beating broad market performance. But will shareholders be elated by the lender’s bid for the second largest microfinance institution?

IndusInd Bank and Bharat Financial Inclusion Ltd (former SKS Microfinance) have entered into an exclusive arrangement to hammer out a merger deal by the end of the current fiscal year. The merger will be an all-share deal. The announcement comes after nearly eight months of heightened speculation over BFIL’s suitor. Shares of the microlender have surged by 20.6% and that of IndusInd Bank have risen by 33% in these eight months.

BFIL got a hard knock due to demonetisation and saw its bad loans surge to 6% of its loan book in the first quarter of the current fiscal year. The microlender posted a loss of Rs37 crore. Microfinance is a far riskier business than traditional retail lending. Usually, there is no collateral other than the trust offered by the borrower and in other times the value of the collateral is subject to much greater volatility than in the case of other secured lending.

Add to this the fact that BFIL itself has a chequered past with allegations of malpractices and a state order that obliterated its profits for some time. But for all its pitfalls, microlending is a fast-growing business and IndusInd Bank’s intent to get a slice of this was stated by the management.

But at what cost would an exposure to such a segment come for IndusInd Bank shareholders? A Mint report on 8 September puts the likely share swap ratio at 1:1.75 which essentially means that every shareholder of IndusInd Bank will get 1.75 shares of BFIL. Brokerage firm Jefferies believes that the swap ratio could be 1:1.85 and at this, IndusInd Bank’s share value dilution would be at least 12.5%. The merged entity would thus be valued a little over Rs1 trillion. At the current market price of Rs967 apiece, BFIL is valued at Rs13,347 crore while IndusInd Bank is valued at a steep Rs92,975 crore.

For the inheritance of a fast-growing loan book and the benefit of cross-selling to additional 6.8 million customers, the price may sound right. Of course, the final swap ratio would need a nod from the respective shareholders and whether the bank ends up paying a premium for BFIL. But IndusInd Bank is already priced to perfection and trades at a multiple of 4.5 times estimated book value for FY18. Whether the jump in its loan portfolio after BFIL merger will boost earnings for investors will depend on how quickly the bank can digest the new entity. And past experience like the merger of Kotak Mahindra Bank and ING Vysya Bank suggests that mergers are long-drawn as two entities try to synergize—in this case—dramatically different operational practices. To that extent, the upside is limited for IndusInd Bank investors.

For those of the microlender, it’s a clear win as they get exposure to a bank, something that BFIL has been pursuing.


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