Lakshmi Vilas Bank (LVB) approved a merger with Indiabulls Housing Finance (IBHF), the fourth largest housing finance company (HFC) in the country on April 5. As part of the deal, the shareholders of LVB will get 14 shares of IBHF for every 100 equity shares held in the bank, the bank said.
Reacting to the news, Lakshmi Vilas Bank rose 5 percent while Indiabulls Housing Finance slipped a little over 3 percent in trade.
Analysts believe that the merger gives IBHL access to banking platform, to provides longevity to its lending business. Investors are advised to hold if they have either LVB or IBHF.
The Reserve Bank of India clarified that it has not yet approved the merger proposal of Lakshmi Vilas Bank, Indiabulls Housing Finance.
The central bank in a statement on Saturday said, "It is also clarified that presence of additional directors nominated by the RBI on the Board of LVB (Lakshmi Vilas Bank) does not imply any approval of the RBI of the merger proposal and the directors have no view on the deal.”
Here’s what brokerage firms think of the merger: Edelweiss Securities
Edelweiss Securities has maintained its buy rating on Indiabulls Housing Finance but raised its target price to Rs 1,104 from Rs 945 per share. According to the brokerage, the proposed merger with Lakshmi Vilas Bank is structurally positive for the company, however, the deal is subject to RBI and other approvals. The brokerage firm believes that robust execution would be needed to churn the platform to tap synergies.
The deal would also positively rub off on regional banks/NBFCs, it added.
The proposed merger between is a win-win deal for both the companies, according to a research note by Motilal Oswal. Following the transaction, IBHF will receive access to the banking platform, while LVB will benefit from the efficiency of IHFL backed by a strong technology architecture, the report added.
It also said, “This deal, though a significant long-term positive for IBHF, will have some adverse transition impact on the near-term return ratios. Expect larger NBFCs to adopt a similar route for the banking license. Now, RBI’s stance on this event will be keenly awaited for further consolidation in the sector.”
According to the brokerage, LVB is valued at Rs 127 per share or a plus 35% Premium to the current price of Rs 93. It believes that the IBHF management plans to leverage bank license to build stronger deposit franchise. IBHF promoters are also open to lowering stake to 15 percent post-merger.
IBHF announced a takeover of LVB – a near-bankrupt regional bank, for no other value than the bank's banking license. From LVB’s viewpoint, being taken over seems the only option left for survival. The brokerage believes that IBHF meets all the required criteria for obtaining a bank license.
The brokerages' initial sense is that the odds are stacked against an RBI approval and they advise investors to wait and watch while maintaining outperform on Indiabulls Housing Finance.
Credit Suisse feels that the proposed merger may act as a catalyst for similar transactions with other small private banks. The merger at the announced swap ratio implies a valuation of 18 percent of LVB’s deposit base. Peer small private banks like South Indian Bank, Karnataka, and Karur Vysya Bank currently trade at less than 10 percent of deposits.If the transaction between the two entities is approved, it can drive re-rating of other small private banks, the brokerage said.