Oct 16, 2017 - employee of BHAF will be transferred into the proposed BC-WOS (Business ... All asset and liability origi
INSTITUTIONAL EQUITY RESEARCH
IndusInd Bank & Bharat Financial Incl. Merger Synergistic but costly buy
INDIA | BANKING | Event update IndusInd bank (IIB IN) and Bharat Financial Inclusion Ltd (BHAF IN) have announced the merger. The details of the merger are: • The merger will be effected through all stock transaction of BHAF into IIB. The swap ratio agreed is 639 share of IIB for every 1000 shares of BHAF. • Simultaneous transfer of BHAF’s business correspondent business into a proposed wholly owned subsidiary of IIB. All the branch infrastructure and employee of BHAF will be transferred into the proposed BC‐WOS (Business correspondent – wholly owned subsidiary). The asset and liability of BHAF will remain in the books of IIB. All asset and liability originated by BC‐WOS will be booked in the books of IIB. • As an anti‐ dilutive measure, the promoter will be issued convertible warrants on preferential basis. The warrants issued will be ~2% on expanded equity. • The entire process would take 6‐9 months to be completed. The appointed date for merger is 1st of January 2018. • The brand name of BHAF will be retained as wholly owned subsidiary of IIB in all its branches. Management’s view on merger: Focus on livelihood finance and existing relationship between IIB and BHAF has trigged the merger. BHAF has been acting as business correspondent of IIB for last 5 years having outstanding loan of Rs5.9bn with 99 BHAF branches exclusively working for IIB. Merger will help bring down the cost of fund of BHAF’s borrowing by ~3%. BHAF loan portfolio is 100% eligible for priority sector loan. This provides opportunity for fee income in the range of 1‐1.5% on excess priority sector loans (PSL). The RWA for bank’s MFI portfolio is 75% vs 100% for NBFC‐MFI. Merger provides cross sell opportunity like deposit product and loan product to BHAF’s customer base. The merger is margin accretive and high return of asset of BHAF will add to the overall RoA of the merged entity. The merger will increase the foot print of the combined entity with almost 3600 branch and financial outlets spread across the country. As per the IndusInd bank management, BHAF provides a strong head start in the livelihood loan and penetration in the rural India with strong technology platform. Some of the benefits like cost of fund will accrue from the day of the merger as the loan from banks taken by BHAF will have to be refinanced. For BHAF, the advantage of cost of fund and abolishment of regulatory concerns (being under banking platform) has been the main consideration. Our take on the merger: The merger do offer lot of synergies and provides opportunity for the entity in terms of liability as well as loan product. However at deal value of 5.5x FY18 book value, we view the deal a bit expensive for IndusInd bank. Moreover, the deal is EPS and book value dilutive by 3% each for IndusInd bank. At a swap ratio of 639 share of IIB for every 1000 share of BHAF, implies a premium of 12.6% to BHAF over two weak volume weighted price (VWAP) IndusInd bank post merger will witness cut in FY19 EPS by 3% to Rs80 whereas book value will see an accretion of 4% to Rs494 owing to preferential allotment to promoters. Given the short term negative impact on EPS, small correction in the IIB cannot be rules out. This should be taken as an opportunity to BUY the stock given the long term benefits and synergies the merger provides. Page | 1 | PHILLIPCAPITAL INDIA RESEARCH
16 October 2017
INDUSIND BANK & BHARAT FINANCIAL INCLUSION EVENT UPDATE
KEY PARAMETERS
Market Cap, Rs bn CMP, Rs swap ratio Equity, Rs bn Networth, Rs bn GNPA, Rs bn NNPA, Rs bn Total Asset, Rs bn Loan book, Rs bn CRAR, % Book Value, Rs Adj Book Value customer, mn Employee Branch + finance outlets ROE, % ROA, % PAT, Rs bn EPS, Rs Book Value, Rs Deal Value at FY18 financials P/BV PE
IndusInd Bank Bharat Financial Sep‐17 Jun‐17 1042.0 138.6 1740.0 1004.0 639 1000 6.0 1.4 223.6 24.2 13.5 4.6 5.4 0.2 1,950 10170 1,232 7625 15.6 31.8 373 175 364 174 10 7 25071 15284 2209 1408 IndusInd Bank Bharat Financial FY18e FY18e 17.2 14.8 2.03 2.74 38 4 64.2 28.2 400.6 202.9 5.5 39.4
Source: Company, PhillipCapital India Research
Page | 2 | PHILLIPCAPITAL INDIA RESEARCH
Merged Entity 1180.6 ‐ ‐ 6.9 247.3 18.1 5.6 12120 8,857 ‐ 360 352 16 40355 3617 Merged Entity 17.0 2.09 42 61.6 389.4
INDUSIND BANK & BHARAT FINANCIAL INCLUSION EVENT UPDATE
Financials of IndusInd Bank Income Statement
Valuation Ratios
Y/E Mar, Rs mn Total Interest Earned Total Interest Expended Net Interest Income Total non interest income Total Income Personnel Expenses Other Expenses Total Op expenses Net Inc (Loss) before prov Provision and contingencies Net Inc (Loss) before tax Provision for Income Tax Net Profit
FY16 1,15,807 70,641 45,166 32,970 78,135 12,361 24,360 36,721 41,414 6,722 34,693 11,828 22,865
FY17 1,44,057 83,431 60,626 41,715 1,02,341 15,210 32,621 47,831 54,510 10,913 43,597 14,918 28,679
FY18e 1,76,852 99,154 77,698 51,542 1,29,240 19,165 39,234 58,399 70,841 12,432 58,409 19,976 38,433
FY19e* 2,43,277 1,23,040 1,20,237 65,308 1,85,545 31,000 50,776 81,775 1,03,770 18,304 85,465 29,229 56,236
FY16
FY17
FY18e
FY19e*
Cash & Bal with RBI
1,01,119
1,86,283
2,14,225
2,69,799
Loans, Adv & Int accrued
8,84,193 11,30,805 14,37,142
20,19,414
Investments
Balance Sheet Y/E Mar, Rs mn Assets
3,50,169
3,76,196
4,50,114
Fixed Assets (Net)
12,553
13,352
15,355
17,950
Other assets
80,935
79,849
83,981
1,80,179
14,28,970 17,86,484 22,00,817
30,26,561
Total Assets
5,39,209
Liabilities Share capital Reserves and Surplus
5,950
5,982
5,982
7,022
1,67,065
1,96,582
2,29,970
3,39,904
3,089
0
5,000
7,000
Borrowing
2,46,870
2,14,537
2,25,264
4,18,829
Total Deposits
9,37,895 12,75,198 16,14,561
20,80,935
Debt
Other liab incld prov Total Liabilities
64,156
80,288
96,345
1,42,861
14,28,970 17,86,484 22,00,817
30,26,551
Source: Company, PhillipCapital India Research Estimates
*FY19e numbers are for the merged entity
Earnings and Valuation Ratios Pre‐provision Operating RoAE (%) RoAE (%) Pre‐provision Operating ROA (%) RoAB (%) EPS (Rs.) Dividend per share (Rs.) Book Value (Rs.) Adj BV (Rs.) Revenue Analysis Interest income on IBA (%) Interest cost on IBL (%) NIM on IBA / AWF (%) Core fee Inc / AWF (%) Portfolio gains / Total Inc (%) Op.Exp / TI (%) Op.Exp / AWF (%) Employee exps / Op exps (%) Tax / Pre‐tax earnings (%) Asset Quality GNPAs / Gr Adv (%) NNPAs / Net Adv (%) Growth Ratio Loans (%) Investments (%) Deposits (%) Networth (%) Net Int Income (%) Non‐fund based income (%) Non‐Int Exp (%) Profit Before Tax (%) Net profit (%) Asset / Liability Profile Avg CASA/ Deposits (%) Avg Adv / Avg Dep (%) Avg Invst / Avg Dep (%) Incr Adv / Deposits (%) Avg Cash / Avg Dep (%) Capital Adequacy Ratio: Tier I (%) CET I (%) NNPAs to Equity (%)
Page | 3 | PHILLIPCAPITAL INDIA RESEARCH
FY16
FY17
FY18e FY19e*
29.2 16.1 3.3 1.9 38.4 5.0 297.4 285.6
28.4 15.0 3.4 1.9 47.9 6.0 345.2 331.6
31.8 17.2 3.6 2.0 64.3 7.0 400.6 384.8
33.8 18.3 3.8 2.2 80.1 8.0 494.1 470.3
9.7 6.6 3.8 2.4 6.0 49.8 3.1 33.7 34.1
9.5 6.2 4.0 2.5 3.5 48.4 3.2 31.8 34.2
9.3 5.9 4.1 2.6 2.5 46.3 3.1 32.8 34.2
9.6 5.4 4.7 2.4 2.2 45.0 3.2 37.9 34.2
0.9 0.4
0.9 0.4
1.1 0.4
2.1 0.7
28.5 40.9 26.5 66.0 32.1 36.9 34.7 28.1 27.5
27.9 7.4 36.0 16.7 34.2 33.7 30.3 25.7 25.4
27.1 19.6 26.6 16.1 28.2 26.6 22.1 34.0 34.0
28.0 19.8 28.9 29.8 34.8 21.3 24.3 39.4 32.9
34.6 92.8 35.7 99.9 12.4 15.5 14.9 14.9 1.8
35.9 90.2 32.8 73.1 13.0
36.8 88.0 28.6 90.3 13.9
37.0 95.5 26.8 94.7 13.3
15.3 14.7 14.0 2.1
15.3 14.8 13.6 2.4
15.3 14.7 13.4 3.8
INDUSIND BANK & BHARAT FINANCIAL INCLUSION EVENT UPDATE
Stock Price, Price Target and Rating History 1700
B (TP 1660)
1500
1300
B (TP 1390) B (TP 1390) B (TP 1344)
1100 B (TP 1150)B (TP 1150) B (TP 1150)
B (TP 1150)
B (TP 950)
900
N (TP 650)
700 N (TP 540) 500
300 J‐14 A‐14 S‐14 N‐14 J‐15 F‐15 M‐ M‐ J‐15 A‐15 S‐15 N‐15 D‐15 F‐16 M‐ M‐ J‐16 J‐16 S‐16 O‐16 D‐16 J‐17 M‐ A‐17 J‐17 15 15 16 16 17
Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition BUY
>= +15%
Target price is equal to or more than 15% of current market price
NEUTRAL
‐15% > to
