IDFC-IDFC First Bank merger: What does this mean for investors?

IDFC First Bank on Monday said that its board has approved the amalgamation of IDFC Financial Holding with IDFC Limited and that of IDFC Limited into the IDFC Bank.

The merger scheme is subject to all requisite approvals from the Reserve Bank, SEBI, Competition Commission, National Company Law Tribunal, stock exchanges, and respective shareholders.

In case of the amalgamation of IDFC Limited into and with IDFC First Bank, each shareholder of IDFC Limited will receive 155 fully paid-up equity shares of IDFC First Bank for every 100 fully paid-up equity shares of IDFC Limited, the bank said in an exchange filing.

Post-merger, the standalone book value per share of the bank will increase by 4.9%, as calculated on the audited financials as of March 2023, the bank said.

Following the merger announcement, shares of IDFC Limited gained nearly 6% to record a new 52-week high of ₹115.7 apiece in Tuesday's trade, while those of IDFC Bank slipped 4%.

Let's take a closer look at how this proposed merger will unlock value for shareholders and the bank itself.

Area of business

IDFC Limited, an infrastructure financing Domestic Financial Institution (DFI) since 1997, was granted "in-principle" approval by the RBI to set up a bank in April 2014, leading to the creation of IDFC Bank Limited.

The bank started its operation in October 2015. The loan assets and liabilities of IDFC Limited were transferred to IDFC Bank. On December 18, 2018, IDFC Bank and Capital First Limited completed their merger, leading to the formation of IDFC First Bank.

Following the merger, the bank has transformed from infrastructure financing to a universal banking franchise. The bank has built a strong deposit franchise, which has grown at a 4-year CAGR of 36% since the merger to reach Rs. 1,36,812 crore by March 31, 2023.

The bank has increased its CASA ratio from 8.6% at the time of its merger with Capital First to 49.77% (March 31, 2023) and has set up 809 branches and 925 ATMs as of March 31, 2023.

In terms of assets, the bank has a well-diversified loan book of Rs. 1,60,599 crore with a balance sheet size of Rs. 2,39,942 crore as of March 31, 2023.

As of June 30, 2023, IDFC Limited, through its non-financial holding company, has a 39.93% shareholding in IDFC First Bank, according to the bank's exchange filing.

Highest-ever net profit

For the fiscal year ending March 31, 2023, IDFC First Bank posted its highest-ever net profit of ₹2,437 crore. The private-sector lender had posted a net profit of ₹145 crore in FY22.

The quarterly net profit grew 134% YoY from Rs. 343 crore in Q4-FY22 to Rs. 803 crore in Q4-FY23, driven by strong growth in core operating income.

Net Interest Income (NII) for FY23 grew 30% YoY, from ₹9,706 crore in FY22 to ₹12,635 crore in FY23. NII grew 35% YOY from Rs. 2,669 crore in Q4-FY22 to Rs. 3,597 crore in Q4-FY23.

Provisions for the year decreased by 46% YoY from Rs. 3,109 crore in FY22 to Rs. 1,665 crore in FY23. Credit cost for FY23 was 1.16%, against the guidance of 1.5%.

Benefits of the scheme of amalgamation

According to IDFC First Bank, the proposed amalgamation is expected to bring several benefits, including growth prospects, unlocking shareholder value, compliance facilitation, simplification of corporate structures, and a larger public float.

Positioned for growth: With the anticipated growth opportunities in the Indian banking system, IDFC First Bank is well-positioned to participate in and contribute to this growth. The bank has a strong deposit franchise and a proven track record of growth.

IDFC First Bank is well-placed to consistently grow in a profitable manner. All the shareholders and stakeholders of IDFC FHCL, IDFC Limited, and IDFC First Bank shall benefit from such growth at the bank, leading to the opportunity for value creation in the long run and maximising the value and returns to the shareholders.

Unlocking the value: This Scheme will provide all public shareholders of IDFC Limited with direct shareholding in IDFC First Bank, thereby helping them to unlock the value of their investments in the business of IDFC First Bank, which is currently held by IDFC Limited through IDFC FHCL.

Consequently, these shareholders of IDFC Limited can take independent decisions with respect to their holdings in IDFC First Bank without being constrained to hold an investment in IDFC Limited to be able to derive the value of the benefit from IDFC First Bank’s business.

Compliance and simplification: The proposed merger will simplify the corporate and organizational structures of IDFC FHCL, IDFC Limited, and IDFC First Bank by consolidating them into a single large, listed company. This will also lead to the unification and streamlining of the regulatory compliances of both IDFC Limited and IDFC First Bank.

The shareholders of IDFC Limited will be allotted shares of IDFC First Bank and will therefore become shareholders of a larger free public float of the combined listed company with multiple growth avenues. Upon the effectiveness of the Scheme, IDFC First Bank will continue to be professionally managed and will only have public shareholders.

Balance sheet neutral action: The proposed utilisation of the securities premium account to set off accumulated losses will not impact the book value of shares, IDFC First Bank's net worth, equity capital structure, or shareholding pattern. This action remains balance sheet neutral and will not result in a reduction in the paid-up share capital, the bank said.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.