MOSL: INDUSIND BANK (Buy)-IIB announces merger with BHAFIN-Gains strong edge in rural distribution

​IndusInd Bank: IIB announces merger with BHAFIN; Gains strong edge in rural distribution; synergies to further boost earnings

(IIB IN, Mkt Cap USD16.5b, CMP INR1750, TP INR2000, 14% Upside, Buy)

IndusInd Bank (IIB) finally announced the long awaited merger with Bharat Financial Inclusion (BHAFIN). As per terms of the agreement IIB will issue 639 shares for every 1000 shares of BHAFIN to the latter's shareholders. We believe that while the merger is clearly a sweet deal for BHAFIN shareholders (swap ratio implies 11% gain for BHAFIN stock based on closing price of 13th Oct, 2017), IIB is also set to benefit as merger will be accretive on margins (~30bp), RoA (~15bp), RoE (80bp for FY20E), EPS (+3%) & Book Value (1% dilution). In the medium term we believe that synergy benefits will arise from - (i) Reduction in funding cost, (ii) Fee income opportunity arising from sale of PSL certificates, (iii) Reduced risk-weights, and, (iv) Increased cross selling opportunities, and this will further boost return ratios for the bank. Besides merger approval, board has also approved preferential allotment of warrants to the promoters to restore their shareholding back to 15%. We continue to like IIB for its strong earnings/business growth and ability to deliver industry leading margins & RoA. We reiterate our BUY rating and maintain our TP of Rs2,000 based on 4x Sept 19 BV.

Microfinance (MFI) exposure will increase to ~8% of merged loan book

• ​IIB currently has MFI portfolio of Rs29bn (2.4% of loan book) which post the merger will increase to ~Rs107bn and correspond to ~8% of total loans. While IIB has shown very controlled growth in its MFI portfolio (~INR29b for the last few quarters) the growth rate for BHAFIN has been higher at ~24% y-y. IIB indicated that over the medium term MFI loans will form ~5% of total loans as it sees strong growth opportunities in rest of the banking business.