IDFC Bank to grow retail business with Capital First deal

IDFC Bank tried to strike a deal with Shriram Group in 2017 to boost its retail business but the deal fell through. Photo: Aniruddha Chowdhury/Mint

IDFC Bank tried to strike a deal with Shriram Group in 2017 to boost its retail business but the deal fell through. Photo: Aniruddha Chowdhury/Mint

Mumbai: IDFC Bank Ltd may have finally found a way to shed its infrastructure finance company image and become a people’s bank—by merging Capital First Ltd with itself. The merger could be a way for the lender to build its retail book, something it has been unable to do in the two-and-a-half years since becoming a bank.

As of 30 September, IDFC Bank’s low-cost current account savings account (CASA) stood at 8.2% of its total deposits.

Retail loans comprise merely 26% of its total loan book, whereas for most established banks, the CASA ratio is above 30%. Analysts say that the bank will be able to leverage the retail network of Capital First to garner more CASA. Merger with Capital First is likely to raise the share of retail loans to 45%.

“They (IDFC Bank) were struggling with their CASA which is close to around 8%, so having a retail franchise was quite critical for them. On the retail front, the bank has not been able to prove much. After the deal with Shriram Group fell through, they needed to do something fast because on the retail side they cannot grow beyond a point as a standalone entity in a short period,” said Abhimanyu Sofat, vice-president—research at India Infoline Ltd.

Sofat said that keeping in mind a low credit growth scenario and the historical baggage of infrastructure loans with which IDFC Bank started off, it would have been difficult to grow organically.

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Even as the deal with the Capital First may not give IDFC Bank the kind of scale which was expected from its deal with the Shriram Group, Capital First’s retail-only focus and robust financials make up considerably for a smaller book.

Shriram Group has a loan book of over Rs80,000 crore whereas, on 30 September, Capital First had a loan book of Rs22,974 crore and gross non-performing assets ratio of 1.63%. Post-merger, the combined entity of IDFC Bank and Capital First will have an AUM (assets under management) of Rs88,000 crore and will serve more than five million customers across the country.

The shareholders of IDFC Bank and Capital First will hold 72% and 28% stake, respectively, in the merged entity.

In 2017, the lender had tried to strike a deal with the Shriram Group to boost its retail business. The deal, however, fell through in October 2017 due to differences over the valuation and the complexities involved in structuring the deal.

Under a three-tiered structure, the retail arm Shriram City Union Finance Ltd was to be merged with IDFC Bank Ltd; Shriram Transport Finance would become a fully owned unit of IDFC and be delisted; and IDFC would also become the holding company for the Shriram Group’s insurance businesses.

“Merger with Capital First will not be a complex deal unlike the Shriram one where several transactions and approvals were required,” said Karthik Srinivasan, group head—financial sector ratings at ICRA Ltd said, adding that the benefits of the merger will start reflecting in the books of the merged entity only after a couple of years as integration of people and systems takes time.

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Moreover, the intention of building a serious retail focus is evident as Rajiv Lall, founder managing director and chief executive of IDFC Bank has agreed to pass on the mantle to V. Vaidyanathan, founder and executive chairman of Capital First. Vaidyanathan, a seasoned banker and former executive director at ICICI Bank, is expected to bring much-needed expertise for building a strong retail portfolio.

Some analysts, however, are of the view that the deal may not solve the bank’s problem of CASA.

“The banking landscape has changed lot in the last one year. While he (Vaidyanathan) has considerable expertise in understanding the working of a bank and building a financial institution from scratch, it will be an arduous task for him to turn around IDFC bank since the merger does not solve the liabilities,” said Suresh Ganapathy, an analyst at Macquarie Capital.