IDFC And IDFC First Bank Merger: A Game-Changer For Investors?

IDFC First Bank has announced that its board has given approval for the merger of IDFC Financial Holding with IDFC Limited, and the merger of IDFC Limited into IDFC Bank. However, this merger scheme is subject to approvals from various regulatory bodies including the Reserve Bank, SEBI, Competition Commission, National Company Law Tribunal, stock exchanges, and shareholders.

Under the proposed amalgamation of IDFC Limited into 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 expects that after the merger, the standalone book value per share of the bank will increase by 4.9 per cent based on the audited financials as of March 2023.

Following the announcement of the merger, shares of IDFC Limited saw a nearly 6 per cent increase, reaching a new 52-week high of Rs 115.7 per share. On the other hand, shares of IDFC Bank slipped 4 per cent.

Let's delve deeper into how this proposed merger will benefit shareholders and the bank itself.

IDFC Limited, which has been an infrastructure financing Domestic Financial Institution (DFI) since 1997, received "in-principle" approval from the RBI to establish a bank in April 2014, resulting in the creation of IDFC Bank Limited.

IDFC Bank commenced operations in October 2015, with the loan assets and liabilities of IDFC Limited being transferred to the bank. Subsequently, on 18 December 2018, IDFC Bank and Capital First Limited merged, forming IDFC First Bank.

Since the merger, IDFC First Bank has transitioned from being solely focused on infrastructure financing to becoming a universal banking franchise. The bank has successfully built a strong deposit franchise, which has experienced a compound annual growth rate (CAGR) of 36 per cent over four years, reaching Rs 1,36,812 crore by 31 March 2023.

IDFC First Bank has increased its Current Account Savings Account (CASA) ratio from 8.6 per cent at the time of the merger with Capital First to 49.77 per cent as of 31 March 2023. Additionally, the bank has established 809 branches and 925 ATMs as of the same date.

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

As of 30 June 2023, IDFC Limited holds a 39.93 per cent shareholding in IDFC First Bank through its non-financial holding company, as stated in the bank's exchange filing.

For the fiscal year ending on 31 March 2023, IDFC First Bank achieved its highest-ever net profit of Rs 2,437 crore. This marks a significant increase from the net profit of Rs 145 crore reported in FY22.

Quarterly net profit also exhibited substantial growth, with a year-on-year increase of 134 per cent from Rs 343 crore in Q4-FY22 to Rs 803 crore in Q4-FY23. This growth was driven by strong performance in core operating income.

Net Interest Income (NII) for FY23 experienced a 30 per cent YoY growth, rising from Rs 9,706 crore in FY22 to Rs 12,635 crore in FY23. NII in Q4-FY23 witnessed a 35 per cent YoY increase, reaching Rs 3,597 crore compared to Rs 2,669 crore in Q4-FY22.

Provisions for the year decreased by 46 per cent YoY, from Rs 3,109 crore in FY22 to Rs 1,665 crore in FY23. The credit cost for FY23 stood at 1.16 per cent, surpassing the guidance of 1.5 per cent.

IDFC First Bank highlights several advantages expected from the proposed amalgamation, including growth prospects, shareholder value realisation, compliance facilitation, simplified corporate structures, and a larger public float.

With the projected growth opportunities in the Indian banking system, IDFC First Bank is well-positioned to participate in and contribute to this expansion. The bank possesses a strong deposit franchise and a track record of sustained growth. Shareholders and stakeholders of IDFC FHCL, IDFC Limited, and IDFC First Bank are expected to benefit from the bank's growth, leading to potential long-term value creation and increased returns.

The merger scheme allows public shareholders of IDFC Limited to have direct ownership in IDFC First Bank, enabling them to unlock the value of their investments currently held by IDFC Limited through IDFC FHCL. As a result, these shareholders will have the flexibility to make independent decisions regarding their holdings in IDFC First Bank without being constrained by an investment in IDFC Limited to derive value from IDFC First Bank's business.

The proposed merger will simplify the corporate and organisational structures of IDFC FHCL, IDFC Limited, and IDFC First Bank by consolidating them into a single large, listed company. This consolidation will streamline regulatory compliances for both IDFC Limited and IDFC First Bank. Shareholders of IDFC Limited will receive shares of IDFC First Bank, making them shareholders of a larger free public float of the combined listed company, which presents multiple growth avenues. Following the merger, IDFC First Bank will continue to be professionally managed and will exclusively have public shareholders.