Sumitomo Mitsui Financial Group's (SMFG's) investment in Temasek-backed Fullerton India Credit Company (FICC) will improve SMFG's profitability and diversify its overseas operations. These benefits will accrue without any significant weakening of its balance sheet, according to rating agency Moody's.
The deal to initially acquire 74.9 per cent shareholding and eventually have 100 per cent stake will result in significant goodwill and is credit positive for SMFG. Japanese financial services group has inked a pact with Fullerton Financial Holdings, a subsidiary of Singapore government-owned Temasek to acquire a 74.9 per cent stake for $ 2 billion.
However, the goodwill is a result of the high price book ratio of 4.7x at which SMFG is making the investment exposing SMFG to a high risk of future valuation losses on the investment.
The substantial goodwill that the deal will generate will result in SMFG's Common Equity Tier-1 ratio declining by only around 22 basis points in fiscal 2021. The investment is in line with SMFG's aim to expand its franchise in Asia.
SMFG aims to realise synergies by leveraging its knowledge of personal loans, loans to small and medium-sized enterprises (SMEs) and online lending in Japan. This it would do so by providing FICC's loan products to SMFG's Japanese customers in India, and giving funding support to FICC.
SMFG’s international business accounted for around 40 per cent of its risk-weighted assets as of March 31, 2021. The additional foreign acquisitions will challenge its ability to manage its growing overseas business alongside its strong domestic franchise, Moody's added.
FIIC offers unsecured loans and loans against property, mainly to SMEs, the self-employed, and mass-market customers and has more than 650 branches across India. It had the sixth largest assets under management among non-banking companies in India as of March 31, 2021, and the highest net interest margin of 11.3% as of March 31, 2021.
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