Marriage with Shriram will aid retail foray
The elevated bad asset ratio of the merged company 4.2 per cent based on FY17 numbers.
Yet, the announcement has kept many questions unanswered, including those on valuations, share-swap ratios, shareholding patterns and timeline for regulatory approvals. The merger of IDFC Bank with the retail focused Shriram City Union Finance (SCUF) may also need a lot of work to be successful.
The merger will aid the retail foray of IDFC bank, which has been seeking to reduce the proportion of its corporate business (75% as of FY17) in the 18 months of its existence. With an asset base of Rs 72,534 crore of the merged entity, IDFC Bank will get an inorganic boost to touch its target of Rs 1.5 lakh crore of loan book by March 2020.
Moreover, the retail proportion of the merged entity stands at more than 45 per cent, compared with 25 per cent for IDFC bank. The management has projected F about 10 million customers of b Shriram Capital as the potential p client base for IDFC bank. Crossselling opportunities to the existI ing 3.6 million customers of l SCUF also appear a positive.
The bank that already has micro finance ( Bharat Banking) and f urban digital ( Bharat Plus) segments can look to build on the small enterprise financing, twowheeler lending and loan against i gold segments of SCUF .
However, T the increased asset base would make it necessary to grow the liao bility franchise at a fast pace to g enjoy lower cost of funds and sups port the loan book growth.
Although the increased customa er base can be beneficial to IDFC Bank that is working to improve its CASA base (5.2 per cent at the end of FY17), the branding of the combined entity will be key for tapping into SCUF's customer base.
Moreover, a breakup of the current regional presence of SCUF shows that close to twothirds of its branches, or 90 per cent of its loan book, is in Andhra Pradesh, Telangana, Tamil Nadu and Maharashtra.
Higher bad asset ratios of each of SCUF's business segments -gross NPA ratio for four of its key segments of SME, two wheeler, personal and auto loans ranges anywhere between 7 per cent and 9 per cent pose another challenge for the merged entity. Even Shriram Housing Finance, a subsidiary of SCUF, with asset under management of Rs 1,775 crore has high bad assets proportion of 5.3 per cent.
While the elevated bad asset ratio of the merged company 4.2 per cent based on FY17 numbers including total assets may appear as an unfavourable outcome for IDFC bank (latest GNPA ratio of 2.99 per cent), the deterioration in net interest margin (NIM) and return on equity (RoE) could have adverse consequences for SCUF.
As against NIM and RoE of 13.6 per cent and 11.1 per cent, the numbers for FY17 for the amalgamated company would be 6.8 per cent and 8 per cent, respectively. Even market cap to FY17 book value would come down from 3.3 times to 1.9 times.