Lakshmi Vilas Bank-Indiabulls Housing. Merger swap favours LVB investors; a pricey deal for Indiabulls Housing

An increasingly tough environment after the NBFC crisis last year, higher cost of borrowing, and the flexibility and trust factor that come along with a banking tag, have led Indiabulls Housing Finance (IBH) strike a merger deal with Lakshmi Vilas Bank (LVB). But given the weak finances of the south-focussed private sector bank, Indiabulls Housing has struck an expensive deal.

According to the swap ratio for merger of LVB with IBH, shareholders of LVB will get 14 shares of IBH for every 100 shares they hold. At the current market price of both listed entities (as of April 5), the deal has happened at a premium of over 36 per cent to LVB’s stock price. The LVB stock is likely to rally sharply on Monday. For IBH, the expensive deal can keep investors on tenterhooks.

But importantly, the amalgamation has to pass the RBI muster. Indiabulls Housing did not receive the banking licence last time around, and it needs to be seen if the RBI gives its go-ahead to the deal.

Even if the necessary approvals come by, whether the merger will pay off needs to be seen. While access to low-cost deposits, flexibility to diversify the asset base, and expand reach are obvious synergies that come with a deal like this for an NBFC, LVB’s weak capital base, poor financial performance and high NPAs could be dampeners.

Also, LVB does not have a huge deposit base – it ranks among the bottom five within the private bank space, both in terms of loans and deposits (just about 1 per cent market share among private banks). LVB’s financial performance has been dismal. For the nine months ended December 2018, the bank reported a loss of ₹630 crore, owing to weak loan growth and rise in NPA provisioning. The bank’s gross NPAs stood at 13.9 per cent of loans. Total capital adequacy ratio of the bank stood at 7.7 per cent, while Tier-I stood at 5.6 per cent. As per regulatory requirements, banks are required to maintain a minimum total capital of 9 per cent (CRAR) of total risk-weighted assets (RWAs). Within this, banks have to maintain a minimum Tier-1 CRAR of 7 per cent with a minimum CET 1 of 5.5 per cent. Hence, for capital-starved LVB, the merger will be a huge respite. But for Indiabulls, while liquidity and asset liability concerns may ease, the deal will bring in limited synergies. Indiabulls has a loan portfolio of ₹1.24-lakh crore and borrowings of over ₹1-lakh crore as of December 2018. LVB has a low deposit base of ₹30,787 crore. Hence, the weak liability franchise of LVB offers limited scope for Indiabulls to bring down the overall cost of funds. Also, LVB has limited presence at 569 branches.

While the merged entity financials shared by the management suggest that there will be a huge improvement in the capital ratio, asset quality and return ratios, how the new combined entity performs over the long run needs to be seen. Above all, various regulatory approvals are awaited. How the RBI views the combined entity’s high exposure to real estate loans also needs to be seen.

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