Rajiv Lall, MD & CEO of IDFC Bank, explains how its merger with Capital First will boost earnings for the bank and help expand in the retail market. Interview excerpts:
How will the merger help IDFC Bank address legacy issues — the ₹450 crore drag on profit before tax due to fixed rate bonds that cannot be replaced or retired before 2021?
The issue with the fixed rate bonds is that the cost of funding for the next 24-36 months is very high. This deal brings in ₹25,000 crore of additional assets of more than 17% yield. Therefore, for that kind of yield, high cost of funds is not an issue. So, it immediately bolsters my profitability relative to my cost of funds and even net of CRR [cash reserve ratio] and SLR [statutory liquidity ratio] requirements, refinancing his liabilities will add further to the profit. So, the financial synergies are quite significant.
But Capital First is an NBFC, so its cost of funds is higher than a bank’s…
When they get merged, their cost of funds will come down to our incremental cost of funds. So far as their present liabilities are concerned, their composition of liabilities is much shorter than ours. Their average cost of funds is 8.2% while IDFC Bank’s is 7.1%.
How do you address the CRR, SLR requirements of Capital First’s assets?
It is not significant. There would be ₹6,000 crore of additional CRR, SLR requirements. We already have ₹2,000 crore of excess. So, we have to buy ₹4,000 of SLR bonds.
How is the deal structured?
It is a very straight-forward deal. It is a merger between IDFC Bank and Capital First. IDFC Bank shareholders will end up owning 72% of the combined entity and Capital First’s, 28%. Their average market cap for the last three months until January 8 was ₹7,000 crore.
Ours was ₹19,000 crore. If you just do a market discovered price versus the negotiated swap ratio, it ends up in a modest premium to their average listed price.
Before this and before Shriram also, we were having other conversations also… other people were demanding control premiums that were crazy. So, the principal shareholders of Capital First were very reasonable in their negotiations. As a result, the control premium is significantly lower than, for example, [what] Kotak [Kotak Mahindra Bank] paid for ING Vysya or what IndusInd paid for taking control of Bharat Financial.
What is the premium that you are paying?
It is about 10%.
IDFC holds 54% in the bank. How would that change?
This will come down to 40%. We had to bring it down to 40% by October 2018, as mandated by the RBI while granting the licence.
You, individually, had been with Warburg Pincus which has a 36% stake in Capital First. Was Warburg instrumental in this deal?
That is what helped build the trust. How did the deal get done so quickly? It depends on trust between people. When others hear me saying ‘we have enough capital to take care all of our asset quality problems’ they can say ‘….everyone says this… why should we believe him?’ This is the difference. People who have known me... and when I tell them this is what the situation is, they trust me.
How will this deal help the bank get deposits?
It does three things: it substantially increases our earnings and therefore our ability to reinvest in building appropriate branch infrastructure; it brings three million customers to whom we can cross sell; and, it brings us distribution reach in the form of a network.
Are you in a hurry? IDFC Bank is only two years old.
Yes, we are in a hurry. There is nothing wrong in being in a hurry provided you make haste slowly and deliberately…t ake one step at a time. This is a major step and we are confident that we can integrate the two organisations relatively quickly.
The counter argument is … if I say I will take seven years to build my franchise then people can get impatient. They may ask why we are not doing it faster.
We are actually listening to people’s comments, advice…shareholders’ advice…when they say in a competitive environment if you want to built a retail franchise, speed and scale is important but not recklessness.
Being listed from day one….
Yes, it is very challenging. Because you are under the glare of market which has its own priorities. To build a business with quarterly market pressure is not an easy thing to do.
You stepped down as the executive chairman of IDFC Ltd to become the chairman of the bank. Now, in two years, you are stepping aside…
I had stepped down from IDFC Ltd. because I have a moral responsibility to see the transition through.
But now why are you stepping aside?
I always wanted to build an institution of quality that stands the test of time. That has been my dream and ambition. It is for the long term. Leadership and people are extremely important. No one leader can be tied to the existence of an institution. The real test of building an institution is succession. I think that having brought this organisation to this point, laid the foundation, build the momentum for growth now, created the infrastructure for retail growth, and now engineered this transaction, this is I think this is an ideal match.
For the last several months, we were looking for somebody to head our retail operations. Whenever I looked at the list of possible candidates, Mr Vaidyanathan is always number one. So this turns out to be ideal. Because we are also getting the senior management not just to drive retail but also to manage succession.
What is your advice to Mr. Vaidyanathan?
Take everybody along, make haste slowly, be in a hurry but don’t be reckless. I am betting on Vaidya that he will build a bank like no other. That... he will actualise my dream of leaving behind a long-term institution.
In the hindsight, what you would have done differently?
I don’t have any regrets. When you say hindsight, you go back to 2012. I had seen the infrastructure decline coming. I had started preparing our board [and] organisation for a strategic pivot. We eventually got the bank licence in 2014.
