Federal BankBSE 0.05 % is planning to sell an up to 26% stake in its non-bank finance unit, Fedbank Financial Services, to private equity firms to raise Rs 400-500 crore, two people with direct knowledge of the matter said.
The Kerala-based private sector bank confirmed plans to raise funds for the unit but didn’t reveal the details.
“Our board has taken a conscious decision to explore all options to raise growth capital for our NBFC. The process is on, but nothing is finalised yet,” a spokesperson said, responding ET’s email seeking comment.
The lender, which has mandated investment banker ICICI Securities to execute the plan, will use the money to grow and expand the unit’s business, the people with knowledge of the matter said.
Federal Bank shares rose more than 7% in the past one month compared with a 2.7% gain in the BSE Bankex, the sector index, reflecting investor interest in the stock.
“The NBFC universe now looks more attractive than banks for long-term investors,” said Souvik Ganguly, managing partner at Acuity Law. “A cocktail of factors is fanning such bullish sentiment,” he said, adding, NBFCs apparently have a better reach to expand loans amid the government’s financial inclusion drive and they also are able to appraise borrowers better than mainstream lenders that are stressed with bad loans and going slow on loan growth.
Fedbank Financial, or Fedfina, obtained its NBFC licence in 2010 after which it started operations as a distribution arm of the parent. It now primarily sells gold and mortgage (home, auto, loan against property, etc.) loans.
According to the NBFC’s annual report, it reported a 40% jump year-on-year in loans to Rs 611 crore as of March 31, 2016. Profit before tax more than doubled to Rs 19 crore from Rs 8.53 crore the previous year.
The company has shown little stress from bad loans as its credit quality is comfortable with gross non-performing assets at a paltry 0.39% of total loans at the end of 2015-16. Ratings company CARE has graded it AA-minus with a stable outlook.
Fedfina, being a wholly owned subsidiary of Federal Bank, enjoys strong parent support in terms of financial and managerial assistance which can be witnessed through the bank’s capital infusion of Rs 190 crore till date and extension of credit lines of Rs 400 crore, the ratings firm said in a note last February.
The strategic importance of Fedfina to Federal Bank is visible from the high degree of management integration, wherein the managing director and a director of the parent are on the board of the unit, CARE said. The company is also engaged in distribution of loan products for the parent, it added.
The company remains robustly confident that these growth trends will continue at a compounded rate, the NBFC said in the annual report in FY16. Fedfina has 100-plus gold loan branches across Tamil Nadu,
Fedfina has 100-plus gold loan branches across Tamil Nadu, Karnataka and Andhra Pradesh. It has diversified into other products like structured finance (construction funding) that has seen exponential growth, to Rs 127 crore since its fiscal 2016 launch. Fedfina is also a distribution partner for insurers like IDBI Federal and Bajaj Allianz.
Source: Economic Times