Capital First & IDFC Bank: Made For Each Other

After a failed bid for merger with Shriram Group due to valuation differences and structuring issues, IDFC Bank decided to merge with NBFC Capital First. Shares of the new entity were listed on the NSE and the BSE on January 16, 2019. As per the terms of the merger agreement, shareholders have received 139 shares of IDFC Bank for 10 shares held in Capital First. The merged entity is now called IDFC First Bank. The merger was completed on December 18, 2018, following the receipt of all requisite shareholder and regulatory approvals. It is commendable that all the regulatory approvals from NHB, CCI, stock exchanges, RBI, shareholders, creditors and NCLT were received in record time of less than a year.  

IDFC First Bank will serve 7.20 million customers through its 203 bank branches, 129 ATMs, 454 rural business correspondent centres across the country. On a combined basis, IDFC First Bank has on-book loan assets of Rs 1,02,683 crore and the retail loan book now contributes 32.46 per cent to the overall loan book.

Strategically, the merger is a step in the right direction to achieve stated intentions of both entities. For IDFC Bank, the goal is to ‘retailise’ its business, while for Capital First, it’s to transform into a ‘universal bank’.  Financially and operationally, this merger will be synergistic, value accretive and provide an opportunity to the new management led by V. Vaidyanathan as MD & CEO to build a robust banking franchise.  

IDFC Bank, after it received the universal bank license in late 2015, was struggling with execution and growth owing to a relatively weak retail assets and liabilities platform. However, in the past two years, it has invested in rolling out 200 branches, building a customer base of more than 3.40 million, increasing the share of retail and corporate assets and reducing stressed assets by introducing retail products, technology initiatives, etc.  

While Capital First under Vaidyanathan’s leadership has a strong track record of building a retail loan book of more than Rs 29,600 crore with a customer base of more than 7 million.  Not only does this merger give Capital First management access to a bank platform, Its product mix and customer profile (LAP, SME loans, two-wheelers, CD financing, etc.) fits well into the banking fold and will have access to low-cost funding avenues.

For IDFC, it entails dilution below 40 per cent. With IDFC’s shareholding in IDFC First Bank getting reduced to 37.6 per cent, it may purchase shares from the market or infuse cash into the bank to take its shareholding back to 40 per cent. The merged entity will have more than 32 per cent of retail assets with an established platform (both entities have invested in building processes, systems and infrastructure), diversified product suite, adequate capital and potential to grow on a sustainable basis.

Will IDFC First Bank be able make a retail impact faster than the other private sector banks have been able to accomplish in the past decade?  The biggest challenge for the merged entity will be to scale up the current account savings account (CASA) base which until now was 13.3 per cent of total deposits. Higher the CASA base to total deposits, lower the cost of funds as a universal bank.  

While there could be near-term challenges in terms of access to low-cost funds, ramp up of the deposit base and PSL requirement, over medium-to-longer-term, the merger should be value accretive and synergistic as lower costs and economies of scale start to show results.