BackICICI Bank puts on hold plans to sell home finance division
Valuation mismatch between ICICI Bank and potential private equity buyers prevented a deal from being struck
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Mumbai: ICICI Bank Ltd, the country’s biggest private sector lender, has put the plan to sell its subsidiary ICICI Home Finance Co. Ltd on the backburner. A valuation mismatch between the bank and potential private equity buyers prevented a deal from being struck, said two people familiar with the transaction.
“The bank’s decision to sell the home finance arm at a valuation of ₹ 2,400 crore, or a 2X of book value was not accepted by PE investors. PE firms’ offer of 20% discount to the valuation sought was not acceptable to ICICI, and the bank has decided not to go with the deal," said the first person in the know.
Global PE investors, such as TPG, Partners Capital and Baring Private Equity Asia, were in discussions with ICICI Bank for a possible deal.
“ICICI Home Finance is not an independent platform, but a portfolio originated from ICICI Bank. To make it an independent entity, you need your own distribution network," said a private equity investor who decided to back out from the discussions.
Standard Chartered Bank and ICICI Securities were advising ICICI Housing Finance.
Emails sent to spokespersons at ICICI Bank, ICICI Securities and Partners Capital on Thursday went unanswered.
Spokespersons at TPG Capital, Standard Chartered and Baring PE Asia declined to comment.
The Piramal Group, TPG Capital and Baring PE Asia are in the race to acquire ICICI Home Finance, The Economic Times reported in November.
According to ICICI Group’s annual report for the year ended 31 March 2015, ICICI Home Finance had assets worth ₹ 1,491.6 crore, contributing to 1.8% of consolidated assets of the group. The company’s ₹ 197.5 crore annual profit was at 1.6% of total consolidated net profit for the ICICI Group.
Profit after tax of ICICI Home Finance decreased from ₹ 223 crore in financial year 2013-14 due to decrease in net interest income and dividend income and an increase in administrative expenses, offset in part by an increase in fee income, said the annual report.
“A large part of the loan book comprises of retail lending. However, the book is quite small when compared with most other housing finance companies in the market. There are some issues with respect to valuation of the asset, as the parent company is pricing it higher than estimate," said a senior official from another housing finance company, requesting anonymity.
When it comes to their housing finance subsidiaries, banks have been not been able to monetize anything.
In November 2015, Mint had reported that PNB Housing Finance Ltd, the housing finance subsidiary of state-owned Punjab National Bank (PNB), had hired five investment banks for an initial public offering (IPO) that could see the company raise approximately ₹ 2,500 crore from the primary market.
PNB holds a 51% stake in the company, while the US-based PE firm Carlyle Group had acquired the 49% stake of Destimoney Enterprises in PNB Housing from New Silk Route Partners last year.
In August 2015, Central Bank of India had stated that it is looking at an IPO for its housing finance arm.
None of these issues have hit the market so far.
“The success of a home finance company is dependent on acquiring cheap funding, hence they might be good targets for strategic investors. As an investment target, housing finance companies also have a very good growth potential as mortgage penetration in the Indian economy is low. However, housing finance companies are trading much higher than many banks in the system, making them very expensive buys," said Vibha Batra, senior vice- president, ICRA Ltd.
According to an ICRA report in January, the total housing credit outstanding in India, as on 30 September, stood at ₹ 11.4 trillion—17% higher as compared to ₹ 10.5 trillion as on 31 March 2015. Housing finance companies and non-banking finance companies in this business own about 37% in this market.
Housing credit as a proportion of gross domestic product has inched up to 8.8% in September 2015, as compared with 7% in March 2007, showing that long-term growth potential for housing finance is high.
ICRA estimates that housing finance firms will need external capital worth ₹ 18,500-28,000 crore over the next five years to grow at a rate of 20-22%.
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