Fairfax's IDBI deal premium justified by strategic fit, scale: Analysts

Mumbai: IDBI Bank's acquisition by Canadian investor Fairfax Holdings at a price-to-book ratio of 1.5 to 1.6 times is slightly higher than the 1.3 times Emirates NBD paid for RBL Bank or 1.4 times Sumitomo Mitsui Banking Corp (SMFG) paid for Yes Bank - marquee cross-border banking deals completed earlier this year.However, analysts believe the slightly higher valuation is justified as it gives the Canadian company a three-fold increase in pan-India branch network, a six-fold increase in its advances book, and about a seven-fold increase in its deposits book.Also Read:Fairfax offers plan to resolve IDBI-CSB ownership overlappingYes Bank price to book is 1.30 times now. For the medium size Axis Bank the price to book is around 1.76 times while for IndusInd Bank it is around 1.04 times.134950477"The proposed acquisition is strategically significant not just because it provides control of a large bank, but because it could complete the foundations of a diversified financial-services ecosystem in India," said Pratik Shah, head financial services at EY referring to Fairfax's controlling stake in IIFL Finance and Go Digit General Insurance.‘Strategic Fit, IDBI Scale“The acquiring entity already has an established presence across banking, lending, wealth and capital markets. The bank adds what every financial conglomerate ultimately needs: a national banking platform with a deposit franchise of over Rs 3.25 lakh crore and a capital adequacy ratio of 26.92%, providing both funding strength and growth capacity,” Shah said.IDBI Bank shares rose 9% to close at Rs 90 apiece on BSE on Wednesday, above the deal price of Rs 81 apiece. The Rs 52,878 crore deal was announced during market hours. Mounting loan defaults had led to IDBI’s gross NPAs peaking to around 32% by September 2018, with capital adequacy ratio dropped to 6.22%. RBI has placed the bank under its prompt corrective action (PCA) framework in May 2017 restricting lending and expansion.In January 2019 LIC infused Rs 21,624 into IDBI for a controlling 51% stake which was widely considered a bail out financing. This equity infusion reclassified from a public sector bank to a private sector bank under RBI guidelines. At the end of June, IDBI had a total deposit base of Rs 3.25 lakh crore at the end of June 2026 more than seven times the Rs 45,415 crore for CSB. More importantly IDBI’s 44% current and savings account (CASA) deposit ratio is one of the highest in the industry, compared with 19% for CSB which is one of the lowest, data from ETIG shows.Similarly, IDBI’s Rs 2.58 lakh crore loan book is more than six times the Rs 40,867 crore loan book of CSB. “Fairfax had a banking licence but with CSB it had a far lower scale and reach. That will change with this acquisition,” said Yuvraj Choudhary, analyst at Anand Rathi Securities. “This acquisition gives Farifax a wider branch presence, access to cheap CASA and a clean balance sheet with NPAs provided for. With the right team this consolidated bank can grow very well,” Choudhary said.IDBI had a net NPA ratio of 0.16% at the end of June with a provision coverage ratio of 99.31% which means any recovery from hereon could add to the bank’s bottomline. Analysts said the acquisition speeds up Fairfax’s ambitions to become a large banking conglomerate in India by a few years and provides a platform with capital to compete with other big banks in India.At the end of March IDBI’s branch network of 2243 branches was two and a half times the 862 branches of CSB. More importantly, these branches are spread across India unlike the South heavy CSB franchise. Siddharth Rajpurohit, lead banking analyst, Systematix Institutional Equities, said Fairfax gets an opportunity to break out of a regional mode and think national with this acquisition.“They were nowhere in the game with their size and network. This brings them into focus because its a recognised brand with solid infra, strong MSME book for example and a bigger liability franchise. As their financials improve we can see many changes in how they do the business,” Rajpurohit said. Analysts said with Fairfax already having stakes in insurance and NBFC businesses, it creates a potential to connect existing financial-services investments through a common banking backbone spanning deposits, lending, wealth management, investment products and capitalmarkets services.“In that sense, the transaction is less about acquiring a bank and more about acquiring the distribution and funding engine for a broader financial-services franchise,” Shah from EY said.