Lakshmi Vilas Bank (LVB) has announced a merger of the bank with Indiabulls Housing Finance (based on the board's approval) in the share swap ratio of 1:7.14 i.e. one share of Indiabulls Housing Finance for every 7.14 shares in Lakshmi Vilas Bank.
It’s the fourth instance of a marriage between NBFC and a bank and for the 2nd time in a row, an HFC has been converted/will have the benefits as of a bank after GRUH Finance and Bandhan Bank merger. The merger on the prima facia looks very good and a marriage made for each other but, it has disadvantages which cannot be ignored.
The Picture
Indiabulls Housing to merge LVB with the HFC.
One share of Indiabulls Housing to be offered to every 7.14 shares held in LVB.
Promoter holding (of Indiabulls Housing) to come down to 19.5 percent vs 21.5 percent currently.
Sameer Gehlaut to be the Vice Chairman of the merged entity.
Gagan Banga and Parthasarathi Mukherjee to be joint MD of the merged entity.
Tier I capital would be at 14.4 percent of the merged entity.
Return on Assets (ROA) of merged entity would be 2 percent and Return on Equity (ROE) of the merged entity would be >19 percent.
LVB would have been breaking Tier I threshold of PCA framework if it continued making losses.
Bank was in need of capital urgently, RBI was happy to consider any proposal for LVB.The fourth merger between NBFC/HFC and a bank
1. IndusInd Bank and Bharat Financial
2. IDFC Bank and Capital First
3. Bandhan Bank and Gruh Finance
4. Indiabulls Housing and Lakshmi Vilas Bank
The implication of the swap ratio
The merged ratio on CMP implies Rs 126.5/share as the value of Lakshmi Vilas Bank.
This would mean a premium of 36.4 percent from current levels.
Equity dilution of 10.5 percent for Indiabulls Housing Fin from current equity.Bank licence conditions
Non-financial business should not be more than 40 percent of the gross income.
88.5 percent of total assets and 81 percent of total income is from the financial sector.
No company has gone to RBI for banking license due to no external advisory committee.
RBI wants NBFC and HFCs to be controlled by residential Indians.The benefits are plenty
Indiabulls Housing is on front foot with respect to SLR and CRR compliances as it has cash of Rs 27,512 crore.
Indiabulls Housing gets banking licence which gives it access to low cost deposits and enables it to lower its cost of funds.
Lakshmi Vilas Bank is struggling with capitalisation. Merging with Indiabulls Housing Finance strengthens its capital levels.
Indiabulls Housing gets access to 569 branches, which in normal circumstances takes banks anywhere between 3-4 years.
Merger could make the merged entity 8th largest private sector bank in India.
Indiabulls has a 'AAA' rating; LVB has a 'BBB' rating.So are the disadvantages
ROE could get dented
Indiabulls Housing has a book of Rs 1.24 lakh crore; SLR and CRR impact could hurt return ratios.
Indiabulls Housing currently enjoys a lower risk weight assets which when converted into a bank and post book expansion into other segments, could lead to faster consumption of capital and higher requirement of capital.
RBI’s compliances are stricter than that of NHB.
Single sector exposure will be quite high at the beginning.
Merger is not NIM, ROA, ROE accretive for Indiabulls Housing like it was for IndusInd Bank.
Transition will take a lot of management bandwidth thereby impacting the operational performance of the entities.The complications
Whether RBI will allow or permit this merger to go through?
Lakshmi Vilas Bank has a GNPA of 13.95 percent and many other parameters which are on the verge of bringing it under PCA framework.
Tier I ratio of LVB is on the lower side.What the RBI says
Merger announcement does not have any approval of RBI at this stage.
Presence of Additional Directors nominated by RBI on the board of LVB does not imply approval of RBI of the merger proposal.
Additional Directors clearly mentioned at the meeting that they have no view on the proposal.
The proposals, as and when received from both entities, will be examined in RBI as per current guidelines/directions.Response from Lakshmi Vilas Bank on RBI’s response
Wish to clarify that the Board has unanimously approved the resolution.
The RBI Nominee Directors, as is the practice at the bank, did not have to participate in the voting or express any views.
The bank also wishes to clarify that the process of applying to the Reserve Bank of India is now on hand.
There has been no prior informal notification to the regulator.How the numbers stack up post-merger
Networth will be at Rs 19,472 crore.
Total book at Rs 1,23,393 crore.
Operating profit of Rs 4,630 crore.
As LVB has been a loss making unit (9MFY19 - loss of Rs 630 crore), profits would be at Rs 2,455 crore.
Tier I ratio at 14.4 percent.
ROA would decline to 2 percent; ROE at 19.2 percent.
GNPA at 3.5 percent; NNPA at 2 percent.First Published: Apr 8, 2019 4:20 PM IST
