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IDFC ’s shareholders have approved the demerger of its financial undertaking into IDFC Bank. With this approval, most of IDFC to IDFC Bank conversion process will be completed. Each IDFC shareholder will get 1 share of IDFC Bank as a consideration for the demerger as on the record date.
There are questions in an investors mind as to what does this development mean for IDFC shareholders and what will IDFC Bank look like in the initial days?
First let’s look at the holding structure. Rajiv Lall, CEO and MD of IDFC in an interview with CNBC described the structure saying that IDFC Limited will be the parent company. Underneath IDFC will be a non-operating finance holding company (NOFHC), as per the RBI norm. Underneath the NOFHC will be the demerged IDFC Bank and other three or four subsidiaries that IDFC currently has including the mutual fund, IDFC Alternatives, IDFC Securities and IDFC Infrastructure Debt Fund. Shareholding pattern of IDFC Bank will naturally mirror that of IDFC as each shareholder of the parent company will be getting one share of the bank.
IDFC Bank will start with about 20 branches, of which six branches will be in Tier-I cities and around 15 branches in Tier-VI cities. The bank will be using the latest technology platform for its operations and scaling up of its banking operations will to a large extent be dependent on the system stabilisation.
As compared to the current operation of IDFC, where it focuses on financing long-term projects, IDFC Bank will be a universal bank and operate in wholesale, retail and rural banking. This will help diversify its risk and yield better returns.
In the beginning, the bank will have to function on borrowed funds since it will take time to build up the deposit base, buy slowly the bank will be able to reduce its cost of funds and improve its spreads. With a balance sheet size of Rs 70,000 crore, the bank will have a loan book of Rs 50,000 crore. The loan book of IDFC will be transferred to IDFC Bank.
For a shareholder, issue of the new IDFC Bank shares is like bonus shares. He will continue to hold shares of the holding company as well as that of the existing business through IDFC Bank. The existing business has the potential of faster growth in revenue and profitability than what it would have in earlier case. The shareholder can choose to sell the holding company shares, which generally are traded at a discount on their actual worth.
Goldman Sachs in a report on the spin-off says if investors stay invested in the parent, net payoffs can be in the range of -55 per cent to +109 per cent based on FY16 earnings. In the case of IDFC Bank, the payoff can be in the range of -35 per cent to +109 per cent assuming conservative valuations and factoring in the changing fundamentals. Liquidity, FII holding and possibility of inclusion in the market indices can all be adding to positive triggers in the company.
IDFC presently trades at around Rs 175, which is at a price to book value of 1.6 times. This valuation is at a discount to other private sector banks. There is enough room for appreciation given the valuation at which other private sector banks are traded and how sharply IDFC’s financials with change once it becomes a bank.
