Analysts don't see much value in IDFC Bank-Shriram merger

An outright merger may not be easy given the structure of the groups

A merger between Shriram group of companies and IDFC group would not be easy and could face regulatory hurdles, analysts said. 

Though the groups have neither confirmed nor denied a merger, a senior official at the Shriram group, requesting anonymity, said some discussions were on. A source said the Shriram Capital board was meeting on Saturday, where the main item on the agenda could be striking some form of alliance with IDFC Bank.

Shriram Capital is the holding company of the two listed firms, Shriram Transport Finance and Shriram City Union Finance, as well as a couple of other unlisted firms.

Business Standard spoke to experts to gauge the possible impact in event of a merger.

Analysts said a merger would be difficult considering the structure of the groups. Shriram City Union Finance and Shriram Transport Finance can be merged with IDFC Bank, but Shriram’s asset management and retail brokerage arms would have to be merged with IDFC Ltd or sold. “Or, there could be back-to-back arrangements with other banks for these units. Banks that do not have a broking arm would be happy to accommodate these at a fair price,” said an analyst with a domestic brokerage. 

According to Suresh Ganapathy, analyst with Macquarie Capital, NBFCs are better suited for used commercial vehicle finance and other such niche businesses. “There are challenges involved in doing cash-intensive, recovery-related businesses through the bank model,” Ganapathy said, adding the requirements of statutory reserve appropriations could distort return ratios. 

It is pertinent to note that Shriram Capital was among 26 candidates that applied for universal banking license in 2013. Only IDFC Bank and Bandhan had received licenses in that round. Later, Shriram Capital management had said it did not want to give up its NBFC business at the cost of having a bank. Now, a merger with IDFC Bank would mean Shriram Capital would have to give up the NBFC business. The Reserve Bank of India does not allow a holding company to have a bank and an NBFC if the latter’s job can be done by the bank.

According to another analyst, working out a synergy for the merged entity would be difficult as IDFC Bank would be expanding its asset side of the book, instead of liability. 

Rajiv Lall, IDFC Bank’s chief executive officer and managing director, aimed at creating a “mass retail bank”, but acquiring customers on the asset side did not make much sense, analysts said. “IDFC Bank must improve its liability franchise (its deposit base). Over a year, IDFC Bank grew its deposits from scratch to over Rs 40,000 crore. If it wants to accelerate its liabilities franchise, acquisition of home or vehicle finance businesses will not help,” an analyst from a foreign brokerage said. 

But it could be beneficial for the Shriram group to merge its transport finance business, given the surge in bad loans among others units. Until recently, the group refused to share details of its customers with credit repositories fearing leak of data. Most of the customers have loans for trucks aged five years and above and their credit discipline is enviable.

But the discipline deteriorated as competitors ate into Shriram’s customer base. In the fourth quarter of FY17, the gross non-performing asset (NPA) ratio in the transport finance arm was 6.2 per cent, up from 3.4 per cent in same period of FY16. Therefore, analysts say acquiring the transport finance business may not be attractive for IDFC Bank. 

“If the merger happens, it will be negative for shareholders of both IDFC Bank and Shriram Transport,” Ganapathy said. 

Acquiring Shriram group would help IDFC Bank meet priority sector lending requirements, which, according to Ganapathy, defeats the purpose of differentiated banking licence. Also IDFC Bank’s effective current account and savings account mix is only 2.5 per cent of the total funding mix. “The value for a bank predominantly comes from its liabilities. Adding more assets is unlikely to have a direct and quick impact on its deposit base,” Ganapathy said.

There is also the question of whether IDFC Bank can absorb the assets of Shriram Transport and Shriram City Union, the combined value of which is over Rs 88,000 crore. IDFC Bank’s loan book is about Rs 49,400 crore, while its investment book is over Rs 50,000 crore. The deal, if it must fructify, would require extensive capital dilution. According to Macquarie, the book value of IDFC Bank could take a knock (see table).

Meanwhile, sources said Ajay Piramal of Piramal Enterprises could sell a part of his 20 per cent stake in Shriram Capital to IDFC Bank. This would allow him an entry into banking but RBI may not take this easily considering it can be interpreted as an industrial house taking stake in a bank, which is not allowed.