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IDBI Bank has decided to merge two of its wholly owned subsidiaries, IDBI Home
Finance and IDBI Gilts. According to the bank’s management, the merger is expected
to get completed by the end of the FY2011. IDBI Home Finance is in the business of
providing housing loans to individuals while IDBI Gilts provides primary dealership
in fixed income securities. Earlier, the bank had tried to sell its housing finance
subsidiary but the attempt was stalled as the business could not fetch required
valuations. The management has now decided to merge IDBI Gilts with IDBI Home
Finance as the former would post losses in the current rising interest rate scenario.
We believe the merger will be slightly positive for the stock as it would lead to
better synergy and help in the expansion of the bank’s retail business. However,
given the smaller size of the two businesses we do not see any major impact of the
merger on our financial estimates. We maintain our Buy recommendation on the
stock with a price target of Rs210 for the stock.
Merger to aid retail expansion
IDBI Bank’s retail portfolio mainly consists of housing loans (97%) and the merger
of its housing finance arm and IDBI Gilts will further expand the retail book. In
FY2010 the housing finance subsidiary had a loan book of Rs3,537 crore, net worth
of Rs252 crore and net non-performing assets (NPAs) of 0.3%. Post-merger the
bank would utilise about 25 branches of the housing finance subsidiary to scale up
its retail business. We believe the expected roll-out of 250 branches in FY2012
coupled with the leveraging of IDBI Home Finance’s branches will give significant
traction to the retail business.
Capital infusion to fuel growth
Recently, the bank received Rs3,119 crore capital from the government by way of
preferential allotment leading to an increase in the cash reserve ratio (CRR) to
14.2%. After the capital infusion, the government’s holding in the bank has increased
to 65.14% (from 52.67%). In addition, the bank has raised Rs2,100 crore through a
medium-term note issue. We believe the capital infusion will reduce the dependence
of the bank on high-cost deposits, leading to an improvement in its margins.
Estimates maintained
We maintain our estimates and sum-of-the-parts (SOTP)
based price target of Rs210 for the stock. We have
assigned the value of Rs2.5 per share to the housing arm
and that of Rs1.4 per share to IDBI Gilts in our SOTP
valuation. Given the small size of the companies, we do
not see any major impact of the merger on our estimates.
However, we believe the merger is marginally positive as
it would help the bank to consolidate its retail portfolio.
We maintain our Buy recommendation on the stock with
a price target of Rs210
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