Lakshmi Vilas Bank is currently hovering near it’s 52 week low of Rs. 36.5. It is a steep fall from levels of Rs. 90. Similarly Indiabulls Housing Finance Ltd (IBH) has performed poorly. From the Rs. 1000 levels it has hit 52 week low of Rs. 420.80. Are these the good levels to enter these stocks? YES. We believe on a long term horizon these will provide good returns. Here are some of the numbers.
On April 5, 2019, the Board of Lakshmi Vilas Bank (LVB) approved the amalgamation with mortgage lender Indiabulls Housing Finance Ltd (IBH) and its subsidiary Indiabulls Commercial Credit Ltd (ICC). The merger is subject to the approval of the Reserve Bank of India (RBI’s) and shareholders of the merging entities.
The objective of the Merger:
IBH will get access to a banking licence which will enable low-cost deposits which in turn will enable lower cost of funds.
Share Swap Ratio:
The shareholder of LVB, for every 100 shares of the company will receive 14 shares of IBH post-merger. The share swap ratio is 0.14 : 1. This swap ratio indicates a 36% premium for LVB shareholders on the basis of the closing price of Rs. 92.80 on April 5, 2019. This agreement will lead to 10.5% dilution of equity for IBH.
Post-merger the promoter shareholding of IBH will come down to 19.5% as compared to 21% at present. Further, the promoters will bring down their shareholding to less than 15% before the merged entity begins with their operations.
Post-merger Sameer Gehlaut will be the Vice-Chairman of the merged entity and Gagan Banga and Parthasarthi Mukherjee will be Managing director. Further, Mr Ajit Mittal will be the executive director of the merged entities.
Pre-Merger Financials of both Entities:
IBH has a net worth of Rs. 17,792 crores by H1FY19. The total loan assets accounted for Rs. 1,24,271 cores which is up by 16.2% YoY. The company’s net profit for H1FY19 stood at Rs. 3,084 crores subject to a increase of 19.7% on a YoY basis. The GNPA of the company in H1FY19 was 0.79% and NNPA was 0.59%. The Return on Equity (ROE) of the company was 27.3% and Return on Asset (ROA) was 3.2%.
LVB has loans advances of Rs. 24,123 crores in H1FY19. The GNPA of the company was 13.9% and NNPA was at 7.9%. The company reported a net loss of Rs. 630 crores for H1FY19.
Financials of Combined Entity:
The merged entity will be the 8th largest private sector bank. The combined loan book will be Rs 1,23,393 crores. Along with this, the net worth will be Rs. 19,472 crores.
The Capital Adequacy Ratio of the merged entity will be 20.6% against the regulatory requirement of 10.875%. Further, the Tier 1 CRAR will be 14.4% against the regulatory benchmark of 8.875%.
Post-Merger the IBH’s expertise in managing SME loan operations of Oak North (a commercial Bank in the UK 40% stake worth Rs. 3000crores of IBH) will help them in increasing their non-housing business.
The branch count of merged entities will be 800 and Employee base will increase to 13,000.
The GNPA will be 3.5% and NNPA will be 2%.
The Return on Equity (ROE) will be 1.2% and Return on Assets will be 2%
The business of both the entities:
Lakshmi Vilas Bank operates 569 branches and 1049 ATM’s across 150 towns and cities in 19 states and one Union territory of India. IBH has branches spread across 18 states and 3 Union territories. IBH provides homes loans, Loan against properties to retail customers which includes MSMEs and businesses.
Pros of the Merger:
The merger will help LVB with the additional capital requirement after their recent QIP of Rs. 460 crores. It also will help them to stay out of PCA Framework of RBI as they have GNPA of 13.9%.
LVB will gain from the efficiency of IBH which operates on a very low-cost liability ratio of 12.7% in FY18 and backed by robust technology structure.
IBH will get the banking licence for which the company was struggling since 2014. This will enable them with low-cost deposits which in turn will enable lower cost of funds. The company will be in direct supervision of RBI and will get access to liquidity through the RBI window.
Furthermore, IBH will get access to 569 branches across 150 towns and cities in 19 States and one Union territories in India.
IBH which has a major presence in North and western region of the country will emerge its presence in the southern region where LVB has 86% of branches.
Previous such Mergers:
This merger will account to 4th such merger in the last 2 years.
1. IndusInd Bank and Bharat Financial Inclusion in FY17
2. IDFC Bank and Capital First in FY18
3. Bandhan Bank and Gruh Finance in FY19
4. Indiabulls Housing Finance and Lakshmi Vilas Bank (Pending)
Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) Requirements of RBI:
IBH is on the forward with respect to SLR and CRR compliances as it has liquidity as on 31st March 2019 it was Rs. 27,512 crores. which will match the SLR and CRR requirements post-merger.
Cons of the Amalgamation:
The ROE of the amalgamated entities will have an impact on the short term. IBH has a loan book of Rs. 1.24 crores the SLR and CRR requirements will impact the return ratios.
IBH enjoys lower risk weight assets. Although, when the NBFC will be converted into a bank post-merger augmentation in different segments could lead to higher capital requirement and faster capital consumption.
This deal is a win-win situation for both entities as IBH gets a banking licence and LVB will get the capital they need. Also, this will assist them to expand their business across the country.
Lakshmi Vilas Bank hit an upper circuit of 5% at Rs. 97.35 for 3 straight days post the announcement of the merger. On April 9, 2019, the stock closed down by 4.98% at Rs. 92.55.
Whereas, Indiabulls Housing Finance gained 2% post announcement of the merger. On April 9, 2019, the stock closed down by 3.21% at Rs. 831.75