Lakshmi Vilas Bank and Indiabulls Housing merger on cards; what should investors do?

Is the announced merger between Lakshmi Vilas Bank (LVB) and Indiabulls Housing Finance (IHF) a marriage made in heaven? It feels like a marriage of convenience.

The share swap ratio of 0.14:1, or 14 shares of IHF for every 100 shares of LVB has been agreed upon by the respective boards of directors. This implies a 35 percent premium to the closing price of LVB as of April 5, 2019 and 63 percent premium to the last six months' average price.

Reacting to the news, Lakshmi Vilas Bank rose 5 percent while Indiabulls Housing Finance slipped a little over 3 percent in trade.

The deal is subject to regulatory approvals, including that from the Reserve Bank of India (RBI). But, it is a win-win deal for both IHF and LVB.

Experts feel that with the merger IHF gets access to banking platform, essentially the liability franchisee and provides longevity to its lending business on a consistent basis. Investors are advised to stay put if they are holding either LVB or IHF.

LVB, despite being in existence for nine decades, has struggled to make a mark in the growing banking industry. It lost market share and has been constrained for capital.

If the merger takes place, then on a proforma basis, the merged entity will have a net worth Rs 19,472 crore and a loan book Rs 1,23,393 crore as of December 2018.

Here’s what brokerage firms recommend to investors:

Motilal Oswal: Stay put| Investors should wait and watch

The brokerage firm sees a bigger impact of this event on the financial sector. Over the last two years, we have already seen Bharat Financials, GRUH Finance, and Capital First adopting this route.

Motilal Oswal expects larger NBFCs to adopt a similar route for a banking license. This makes old-generation private sector banks attractive opportunities. RBI's stance on this event will be keenly awaited for further consolidation in the sector.

Edelweiss Securities: Indiabulls Housing: Buy| Target: Rs 1,104

Edelweiss Securities maintained its buy rating on Indiabulls Housing Finance but raised its target price to Rs 1,104 from Rs 945/share.

The proposed merger with Lakshmi Vilas Bank is structurally positive for the company; however, the deal is still subject to RBI and other approvals, it said.

Strategic value unlocking should outweigh the price. The brokerage firm is of the view that robust execution would be needed to churn the platform to tap synergies.

The deal would also positively rub off on regional banks/NBFCs.

Macquarie: Investors should wait and watch

IHF announced a takeover of LVB – a near-bankrupt regional bank, and the only reason why Indiabulls Housing is interested is its banking licence.

From LVB’s viewpoint, being taken over seems the only option left for survival. IBH meets all the required criteria for obtaining a bank licence.

“Our initial sense is that the odds are stacked against an RBI approval. We advise investors to wait and watch, and maintain outperform on Indiabulls Housing Finance,” said the report.

Credit Suisse: Re-rating of other small banks possible

Credit Suisse is of the view that the proposed merger may act as a catalyst for similar transactions with other small private banks.

The proposed merger at announced swap ratio implies a valuation of 18 percent of LVB’s deposit base. Peer small private banks like South Indian Bank, Karnataka and Karur Vysya Bank trade at less than 10 percent of deposits.

The transaction between the two entities, if approved, can drive re-rating of other small private banks.