How Brokerages View Indiabulls Housing Finance-Lakshmi Vilas Bank Merger

Indiabulls Housing Finance Ltd. proposed merger with Lakshmi Vilas Bank may run into regulatory hurdles given the housing finance company’s real estate exposure, brokerages said.

Shareholders of Lakshmi Vilas Bank will get 14 shares of Indiabulls Housing Finance for every 100 shares as part of the merger. The biggest concern around the deal is whether the proposed transaction will get Reserve Bank of India’s approval.

Here’s what the brokerages have to say on Indiabulls Housing Finance-Lakshmi Vilas Bank merger:

Macquarie On Indiabulls Housing Finance

• Maintain Outperform with Target Price of Rs 836
• Odds are stacked against RBI approval
• In the past, RBI wielded considerable subjectivity allowed to it under the ‘fit & proper’ clause
• Despite having persons with good credentials on its board, Indiabulls failed to get license earlier
• Don’t think approvals to Bandhan-Gruh, IndusInd Bank-Bharat Financial, Capital First-IDFC Bank will mean a nod in this case as well
• Bandhan and IndusInd Bank were large banks taking over smaller NBFCs
• Capital First did not have real estate exposure

Investec

• Merger may face regulatory hurdles; not much upside for Indiabulls
• Group’s exposure to real estate may pose hurdle
• Indiabulls Ventures Ltd. is kept outside the merger, which is not allowed as per RBI guidelines
• Merged bank likely to be weak given just 23 percent CASA at LVB, and Indiabulls’ dominant mortgage book, a low return on assets product

Credit Suisse

• Swap ratio implies 10.5 percent dilution for Indiabulls Housing Finance
• Return on equity to drop to 10 percent in the first year of merger vs 24 percent currently
• Higher reserve requirement, priority lending, higher operational expenditure to weigh on RoE
• Given LVB’s weak deposit franchise, funding cost benefit will be limited in near term
• Indiabulls will get access to more stable funding, RBI’s repo window, will also be able to operate at a higher leverage
• Stay neutral with stock trading at 2xFY21 merged book
• Progress on RBI approval and branch/deposit franchise scale up will be key

CLSA

• Share swap ratio implies 35 percent premium to LVB’s market price or 2x p/book for LVB
• Approvals could take six to nine months
• Promoters open to trim shareholding to 15 percent post merger
• IHFL will also comply with norms on SLR, CRR and PSL

JP Morgan

• LVB acquisition a key positive for Indiabulls Housing Finance
• Book Value per share dilutive by 10 percent but offset on deposit acquisition
• RBI approval key to watch