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MOSL: FINANCIALS | IDFC–Shriram-Creating a large financial conglomerate-Swap ratio key for SHTF and SCUF shareholders

​Financials | IDFC–Shriram: Creating a large financial conglomerate; Swap ratio key for SHTF and SCUF shareholders

• IDFC Bank and Shriram Group have announced their intent to explore a merger during the course of a 90-day exclusivity arrangement. During this period, the boards of both companies will apply for regulatory approvals. The merger will place IDFC Limited as a holding company with three subsidiaries: (1) SHTF as a standalone NBFC subsidiary, which gets delisted, (2) IDFC Bank (IDFCB; into which SCUF will merge), and (3) insurance businesses (life and general), in which IDFC Limited will hold 75% stake. The company has commented that after all approvals, it will take 12 months to complete the transaction. IDFCB is the key beneficiary, in our view. IDFC Limited would get a strong operating company post-merger. We believe the deal would require a very favorable swap ratio for Shriram group investors. Key risks: regulatory approvals, execution risk, extent of holdco discount and meeting RBI requirement of minimum shareholding by IDFC ltd in IDFCB of 40%.

IDFCB – win-win

The merger will give IDFC Bank (IDFCB) access to 2,000 touch points and 10m+ customers of the two Shriram group NBFCs, which will help it to generate retail deposits and fee income. Further, the merger will help ensure that IDFCB, with access to SCUF’s loan book, can meet PSL requirements with ease (50+% PSL compliant). IDFCB has INR494b of loans and SCUF has INR230b of loan book. IDFCB’s savings on the negative carry of PSL (~INR3b) is expected to outweigh SCUF’s negative carry on CRR/SLR (INR1.7b). IDFCB is already carrying excess SLR on its balance sheet; hence, CRR/SLR should not impact profitability. Post-merger, IDFCB will have ~0.9% market share in loans. Further, there are low hanging fruits on opex (high employee base) in SCUF with the help of IDFCB technology can be extracted. Execution challenges, technology integration and HR challenges would be the key risks.

SCUF – swap ratio is key

The biggest benefit for SCUF will be access to low cost deposits. In the near to medium term, organic growth would have remained healthy for SCUF and the liability side would not have been a concern. However, over a long period, doing lending business under a banking platform is more beneficial. Since IDFCB will be a major beneficiary of this merger, we expect favorable swap ratio for SCUF shareholders.