Indusind Bank -RBS book acquisition – EPS-accretive deal :: Nomura research

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IIB has said it will buy RBS’s diamond / jewellery financing business in India. The loan book is INR45bn (7% of IIB’s loans) and despite it being more profitable than IIB’s current business (ROA of 1.9-2.0%), management highlighted that it is an EPS-accretive deal, indicating that the cost of acquisition has been reasonable. Apart from providing an inorganic B/S opportunity, this acquisition should provide IIB with more trade finance opportunities. Though the size of the acquisition is small, an EPS-accretive deal is positive and this also will accelerate IIB’s capital-raising plans, which would be +15% book accretive. The acquisition: INR45bn of diamond/jewellery loan book  IIB has agreed to buy RBS’s INR45bn diamond/jewellery financing business in India. This is part of ABN AMRO’s diamond financing business globally, housed in RBS India. RBS has been under pressure from the UK government to support their domestic operations and is in the process of exiting non-core businesses in India/Asia.  IIB specialises in the diamond financing business and senior management have been involved with this loan book being acquired in their previous stint with ABN AMRO, and hence have the required expertise.  Most of the INR45bn book is working capital export finance to marquee diamond players and not plain vanilla gold financing, and hence margins and fees in this business are higher than IIB’s existing book – IIB in the last few years have built a strong trade finance / FX business for mid-sized corporates and this acquisition will enhance their competitiveness.  As per management, overall profitability of this book (ROAs) is higher than IIB’s current ROAs of 1.9-2.0%.  While the risk could be of high delinquency in the diamond business, given the experience of PSU banks, IIB’s management indicated that the lending is to top marquee names in the diamond business and historic credit costs have been low in this book. No indication of acquisition cost – But an EPS-accretive deal as per management:  Management has not commented on the cost of acquisition for this business but have indicated that the cost is not large and the deal will be EPS accretive to IIB.  In our estimates (Figures 1 and 3), the business could add 5% to IIB’s FY16 PBT. So the deal will be 5% EPS accretive if IIB does not pay anything to acquire the book, and paying anywhere between INR2bn and INR10bn for the deal would be EPS accretive.  While an EPS-accretive deal is positive, we believe constraints on growth given the parent’s intent to exit non-core lending business in India would have led to RBS settling for a lower consideration.