A merger of a weak bank and a non-banking financial company (NBFC) would typically mean a big win for the latter. A bank licence guarantees the NBFC access to low-cost public deposits; for the weak bank, it would mean securing capital crucial to stay afloat.
To that extent, the merger of Indiabulls Housing Finance Ltd (IBHFL) and south-based private sector lender Lakshmi Vilas Bank Ltd (LVB) would look like a win-win.
Indeed, many analysts have termed the proposed merger exactly so in their notes.
Last week, Indiabulls Housing Finance said it would merge with Lakshmi Vilas Bank in an all-share deal: 100 shares of the bank will fetch 14 of the housing finance company.
This swap ratio indicates Indiabulls Housing Finance will pay top dollar for access to deposits of a little more than ₹30,000 crore. It would also secure access to more than 100,000 customers with a cross-selling opportunity to boost fee income. A network of more than 570 branches as a foundation for future growth is like the cherry on the top.
But Lakshmi Vilas Bank comes with its legacy issues. As of December, the bank had a rather weak balance sheet with the capital adequacy ratio (CAR) falling sharply to the minimum regulatory threshold.
The bank’s Tier 1 capital has fallen to 7.7% and its gross bad loans shot up to more than 13% of its loan book. It was within a hair’s breadth of coming under the regulator’s quarantine scheme of prompt corrective action.
Lakshmi Vilas Bank did a quick qualified institutional placement (QIP) last month to raise ₹460 crore at ₹72 a share. Indiabulls Housing Finance is willing to pay a stiff premium of nearly 30% above its QIP price. Part of the reason is the sharp rise in the cost of borrowings triggered by the liquidity crisis in September.
“IBHFL has been vocal about its banking aspirations in scaling up its business model. The recent liquidity challenges tested its resilience. We believe both these factors catalysed IBHFL’s merger with a universal banking platform," Motilal Oswal Securities Ltd said in a note.
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Even so, Indiabulls Housing Finance would be taking on dud loans of ₹33,643 crore, which would be more than 3% of the amalgamated entity’s book.
Lakshmi Vilas Bank has a 93-year-old rich legacy and a firm grip on a big slice of the southern India market. Nevertheless, Indiabulls Housing Finance shareholders need to monitor the progress of the merger, and that could be some time away.