Connect with us

Hi, what are you looking for?

Finance

IDFC Bank’s valuations likely to improve post Capital First deal

ET Intelligence Group: Longterm investors will benefit from ..

ET Intelligence Group: Longterm investors will benefit from the merger of Capital First and IDFC Bank. The deal, announced on Saturday and subject to regulatory approvals, will help IDFC Bank to reduce the valuation gap with private banks that have better exposure to the retail segment.

A focus on improving performance in terms of lowering bad debt, better return on equity, and higher retail disbursement is the common thread that joins the two institutions.

Historically, IDFC Bank has a greater proportion of infrastructure loans thanks to the parent, IDFC, which provides credit mainly to such projects. As a result, the corporate segment constitutes over 73 per cent of its loan book of Rs 68,797 crore. In addition, the ratio of current account and savings account (CASA) deposits, the cheapest source of funding, form just over 8 per cent of total funding. The proportion of gross nonperforming assets (GNPA) in total advances was also significantly higher at 3.9 per cent.

Some of the larger peers have been able to control better asset quality by having a healthy mix of retail and corporate loans and a better CASA proportion. For instance, with a loan book of nearly Rs 6.1 lakh crore, HDFC Bank has 46 per cent exposure to the retail segment. Its GNPA was 1.3 per cent and CASA ratio was nearly 50 per cent at the end of September 2017. In another example, retail loans form 40 per cent of IndusInd Bank's total advances of Rs 1.2 lakh crore. Its CASA ratio was 40 per cent and GNPA was 1.1 per cent at the end of December 2017.

To improve performance, it's necessary for IDFC Bank to increase exposure to the retail segment. And, this is where its decision to merge with Capital First, which has 93 per cent exposure to the retail lending, makes sense. The combined loan book will have an advantage of larger spread across loan segments from large infrastructure projects down to micro enterprise lending.

IDFC bank is valued at price-book (P/B) of 1.5, much lower than HDFC Bank's P/B of five and IndusInd Bank's P/B of 4.5. The gap is expected to reduce in the future given the merger synergies.

Besides, investors may also want to consider the attractive share swap ratio. IDFC Bank will offer 139 shares for every 10 shares of Capital First. On Friday, the bank's stock was traded at Rs 67.7 while the latter's was quoted at Rs 835.9. At these prices, 10 shares of Capital First are worth Rs 8,359, 12 per cent cheaper than the 139 shares of the bank, which are worth Rs 9,410. An investment in Capital First shares would therefore earn 12 per cent return, though this gain may be wiped out once shares start trading on Monday.

Original Article

[contf]
[contfnew]

ET Markets

[contfnewc]
[contfnewc]

Click to comment

Leave a Reply

Your email address will not be published.