Analysts not too enthusiastic about IDFC-Shriram Capital merger

MUMBAI: The proposed merger between IDFC and Shriram Capital once consummated is likely to be a disaster in the making both for the companies and shareholders, analysts say.

According to analysts, the biggest challenge will be merging the loan books of IDFC Bank and the two Shriram group firms — Shriram Transport Finance Ltd and Shriram City Union Finance. While the bank has an infrastructure heavy loan book, STFL and SCUF is primarily focused on commercial vehicle, consumer and enterprise financing in the rural market. To be sure, the merger will benefit IDFC Bank in that it will help achieve its priority sector lending targets, but at an added cost of keeping statutory liquidity ratio and cash reserve ratio on the group companies’ portfolios.

“There are challenges involved in doing cash- intensive businesses and recovery related businesses through the bank model,” said Suresh Ganpathy, banking analyst, Macquarie Capital Securities India (Pvt) Ltd, in a note to clients

The other challenge will be growing its liabilities book on a combined loan portfolio worth ₹ 1.5 lakh crore. Currently, IDFC’s current and savings account ratio stand at 5.2% at the end of March 2017. Analysts believe the merger will add more wholesale deposits on the bank’s books, which will hit returns.

Macquarie for instance expects return on equity on STFL shares to fall from 12% to 9% on merger with IDFC. Foreign brokerage Nomura Global research expects 25% dilution in IDFC Bank’s book value.