What The IndusInd-Bharat Financial Combine Looks Like

IndusInd Bank Ltd. will complete its merger with Bharat Financial Inclusion Ltd. by July 4, bringing an end to India's first for-profit microlender.

Founded as SKS Microfinance Ltd. in 1997 by Vikram Akula, the non-banking financial company went through trouble immediately after listing in 2010 as Andhra Pradesh clamped down on microfinance firms. Akula was later forced out even as the Reserve Bank of India took over the regulation of the microfinance sector. In 2016, the NBFC was renamed Bharat Financial Inclusion.

IndusInd Bank acquired the non-bank lender last year to expand its reach and scale up its microfinance business. The Indusind-Bharat FInancial merger would boost the bank's customer base by 2 crore and more than double its branch count. The combined entity will disclose its consolidated financials for the quarter ended June.

Based on BloombergQuint's calculations, here's a look at the financials of the Indusind-Bharat Financial merged entity:

As IndusInd Bank's book already includes some prior loans given to Bharat Financial, only the microfinance lender's Rs 7,620-crore worth of loans have been considered in the merged entity's gross loan number to avoid double accounting.

The merger would raise the bank's capital adequacy by 100 basis points to 15 percent, according to BloombergQuint's calculations. That means it would free up more than Rs 2,200 crore in capital for the bank.

Brokerage View

Prabhudas Lilladher

• Post-merger benefits could be used for additional contingency provisions. Merger provides a better balance to loan book (48-50 percent consumer share).
• EPS target revised to Rs 86.9 from Rs 85.5 earlier, and cut price target to Rs 1,800 from Rs 1,832.
• Bharat Financial is Indusind Bank's missing piece of rural and semi-urban presence, helping granularity in liabilities and sustained growth.

Axis Capital

• Merger is value accretive as Indusind Bank gets to strengthen its rural focus while customers of Bharat Financial get access of baking products.
• Bharat Financial will add granularity, or a wider customer base profile, to IndusInd Bank's loan book, particularly in the retail segment.
• Indusind Bank wants an equal mix of retail and corporate loans compared with the existing 46:54.
• Axis Capital estimates that FY21 return and assets and return on equity of the merged entity to be better at around 2 percent and 19.5 percent, respectively.

Nomura

• IndusInd Bank's retail asset mix remains its strength.
• The acquisition of Bharat Financial will strengthen its assets.
• The merger will be margin accretive both adding a higher-yield microfinance book, besides lower funding costs for Bharat Financial liabilities by 200 basis points.
• The Indusind-Bharat Financial merger to be 5-6 percent earnings accretive.
• Nomura expects return on assets of 1.98 percent and a return on equity of 19.1 percent by FY21.
• The merger exposes IndusInd Bank to the structural risks of microfinance sector. The merged entity may also not be able to benefit from cross-selling as the bank will have to tailor products for micro borrowers.