After the failure of IDFC Bank-Shriram Group merger over valuation, IDFC Bank has now gone for merger with Capital First, a non-banking finance company. The all-share merger deal was done keeping in mind IDFC’s aim to achieve six million customer base by 2020. If the merger goes through, the share of retail loans in the bank’s book would double from the current 26%. And if IDFC becomes second time lucky with this deal, then it can realize its ambition from becoming a dedicated infrastructure financier to a well-diversified universal bank.

While Capital First and IDFC seem relatively closer in size than Shriram Group, it remains to be seen if the deal can cross all the hurdles including regulatory as well as the problems of personality clashes that often bedevil mergers. Synergies in culture and technology will give the deal an edge. The deal makes some sense for IDFC as it can then expand its retail footprint with adding 228 centres of Capital First’s branches. If the merger goes through, the two entities can create an entity with assets under management of Rs 88,000 crore and customer base of 50 lakh. As per the scheme of amalgamation, IDFC Bank will issue 139 shares for every 10 shares of Capital First. The deal values Capital First, which is owned more than a third by private equity firm Warburg Pincus at Rs 938.25 a share based on the share price of the two companies based on the day of the announcement (January 13).

The deal clearly favours Capital First in terms of the swap ratio as the company is richly valued due to return on equity of 12%. Existing shareholders of IDFC Bank and Capita First will retain ownership shares of about 71.2% and 28.8%, respectively. After the merger, V Vaidyanathan, chairman and managing director of Capital First will succeed Rajiv Lall as the MD and CEO of the combined entity. Rajiv Lall will become the non-executive chairman of IDFC Bank.

About Capital First

Capital First Limited is a non-banking finance company specializing in MSME and consumer financing supported by proprietary credit evaluation methodologies and strong credit scoring platform. Warburg Pincus owns 36% in Capital First. The company also offers loans to salaried consumers and small enterprises primarily for home loans, two wheeler loans, durable loans, working capital, short-term business needs and for consumption. The company has a high long-term credit rating of AAA and has a board comprising of reputed professionals with many decades of rich experience in the corporate sector.

In the three months to December 2017, the company reported profit after tax of Rs 87 crore, which is an increase of 42% from Rs 61.4 crore in the same period the previous year. In fact, this is the highest ever quarterly profit in the history of the company. The gross non-performing asset (NPA) of the company reduced sequentially from 1.63% as of September 2017 to 1.59% as of December last year.

About IDFC Bank

IDFC operates as an infrastructure financing company whose focus areas are energy, telecom and transportation. IDFC owns around 53% stake in IDFC Bank launched in October 2015. IDFC Bank Ltd. (Infrastructure Development Finance Company) is an Indian banking company with headquarters in Mumbai that forms part of IDFC, an integrated infrastructure finance company. The bank started operations on October 1, 2015 and received a universal banking licence from the Reserve Bank of India (RBI) in July 2015.  To conform with RBI guidelines IDFC founded a non-operative financial holding company (NOFHC) in 2014 to manage its five subsidiaries IDFC Bank, IDFC MF, IDFC Alternatives, IDFC IDF & IDFC Securities. IDFC is the holding company for NOFHC IDFC Projects Ltd and IDFC Foundation.

Benefits for IDFC Bank and Capital First

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