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IDFC Bank and Capital First Merger: Who Gains?

The merger will result in a combined valuation of Rs 33,000 crore in market capitalisation. Shareholders of both the banks to benefit in the long run

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While IDFC Bank and Capital First merger will benefit the shareholders of both financial firms in the long run, in the immediate short-term, shareholders of Capital First could see a marginal upside to adjust for the share swap ratio. IDFC Bank trades at Rs 67 while Capital First at Rs 837 on the bourses. Adjusting for the share swap ratio of 139 IDFC Bank shares for 10 Capital First shares, the stock of the latter could see an upside of about 11 percent.

Another possibility analysts contend is that IDFC Bank could see a correction of about 5 percent while Capital First could gain 6 percent to adjust for the 11 percent valuation gap.

For both the firms, the merger is a win-win. IDFC Bank will get a strong retail loan book, while Capital First will be able to pursue its banking ambitions. IDFC Bank, which started operations in October 2015 after getting a banking license, largely has a loan book that comprises of infrastructure loans. Capital First, on the other hand, is present in the retail segment where IDFC is trying to build a retail franchise.

For Capital First, the timing of the merger couldn’t have been better as the firm already has built a sizeable presence in retail loans, however, it will now be able to access low-cost deposits and thus reduce its borrowing costs.

For IDFC Bank will get access to a large retail book of Rs 22,974 crore and a customer base of 3 million. Post-merger, the combined entity will have an AUM of over Rs 88,000 crore and a profit of Rs 1268 crore.

On the asset quality front, Capital First has a healthier balance sheet with lower gross non-performing assets of lower than 1.5 percent, while IDFC Bank has a higher gross non-performing loan ratio at 3.9 percent. IDFC Bank’s loan book has improved after a pruning of some of its dud loans to asset reconstruction companies.

On the valuation front Capital First commands a higher premium on the bourses trading at 3.6 times its book and a PE of 32.6 times. IDFC Bank, on the other hand, quotes at a book value of 1.5 times, while it trades at a PE of 22.3.

The new combined entity is expected to be worth more than Rs 33000 crore on the bourses. While the merger could bump up operations costs in the near term, analysts contend that the merger will benefit the joint entity as the synergistic benefits of lower costs and economies of scale start to accrue over time.

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