Merger of IDFC Ltd and IDFC FIRST Bank

The things that you should know about

A few days following the announcement of the massive merger between HDFC and HDFC Bank, IDFC First Bank gained board approval to combine its operations with IDFC and IDFC Financial Holding. According to IDFC, the proposed transaction will benefit its shareholders and provide them direct ownership of IDFC First Bank.

According to a regulatory filing, investors will receive 155 shares of IDFC First Bank for every 100 shares they currently own in IDFC as part of the proposed merger between the two institutions. According to analysts, shareholders of IDFC Ltd. stand to gain from the share-swap ratio that is being proposed as part of the merger. 
According to analysts, the share swap ratio proposed in the transaction is expected to benefit owners of IDFC. IDFC First Bank has stated that the deal will eliminate promoter holdings, pending regulatory approval.

CLSA maintains an 'underperform' rating on IDFC First Bank with a target price of Rs 85, indicating a potential upside of 3.7% from Monday's price. Morgan Stanley maintains an 'equal-weight' rating on the stock with a target price of Rs 80.

Currently, IDFC holds a 39.93% stake in IDFC First Bank through its subsidiary, IDFC FHCL.
The proposed three-pronged merger aims to simplify the corporate structure and improve regulatory compliance. IDFC First Bank expects a 4.9% boost in standalone book value as of March 31, 2023, as a result of the amalgamation. Additionally, the merger is expected to strengthen the bank's balance sheet by 20-25% annually in the near to medium term.

The merger scheme is subject to all necessary clearances from the Reserve Bank, SEBI, Competition Commission, National Company Law Tribunal, stock exchanges, and both organizations' shareholders.

Subject to unforeseen events, it is expected to be finished in the current fiscal year.

IDFC Ltd and IDFC Financial Holding Company Ltd selected Axis Capital Ltd in March 2023 to examine the fairness of the share exchange ratio for the merger.

The companies have now completed all steps of corporate simplification, with the next step being the merger with IDFC First Bank.

What does this mean for investors?

The IDFC-IDFC First Bank merger will result in the consolidation of IDFC FHCL, IDFC Limited, and IDFC First Bank into a single entity. This amalgamation aims to simplify the corporate and organizational structure of the three firms.

With IDFC Limited selling its AMC business, its financial strength now heavily relies on the performance of IDFC First Bank. This transaction highlights the bank as its primary asset.

Investors can expect consistent and profitable growth from IDFC First Bank following the merger. The bank's deposit franchise has shown significant growth, with a 4-year CAGR of 36% and reaching Rs. 1.36 trillion by March 2023. The bank has also improved its CASA ratio from 8.6% to 49.8% during the same period.

IDFC First Bank has a strong loan book of Rs. 1.6 trillion and a balance sheet of Rs. 2.4 trillion as of March 2023. Its gross NPA stands at 2.51% and net NPA at 0.86%.

The merger is expected to be balance sheet neutral, and IDFC First Bank will issue shares to the shareholders of IDFC Ltd. The deal will eliminate promoter holdings, resulting in the merged entity being fully owned by institutional and public shareholders.
Additionally, IDFC has Rs. 6 billion in cash, which will be transferred to IDFC First Bank after the merger. The company plans to raise capital worth Rs. 20 billion by FY24, further strengthening its capital adequacy.

Overall, this merger presents an opportunity for value creation in the long run, benefiting all stakeholders involved.