Title of case study

IDFC First: Merger of IDFC bank and Capital First:A win- win
preposition?

IDFC First: Merger of IDFC bank and

Capital First: A win- win preposition?

Prolouge

The erstwhile IDFC Bank was created by demerger of the infrastructure lending business of IDFC Limited to IDFC Bank in
2015. IDFC Limited was set up in 1997 to finance infrastructure centering primarily on project finance and mobilization
of capital for private sector infrastructure development. Whether it is financial intermediation for infrastructure projects
and services, whether adding value through innovative products to the infrastructure value chain or asset maintenance of
existing infrastructure projects, the company focussed on supporting companies to get the best return on investments.
IDFC led infrastructure financing in India IDFC was focussed on helping to develop the framework for making the
funding of long gestation private infrastructure projects possible on a commercial basis.

IDFC assumed a key job in helping different government offices to plan the authoritative bases and a portion of the
approaches for making Public Private Partnerships (PPPs) financeable. IDFC .Dr. Rajiv B. Lall joined IDFC Ltd in 2005 and
broadened the organization into into a large financial conglomerate. Around the same time, IDFC Ltd got listed both in
BSE and NSE at a listing price of ' Rs 60 for every offer. The Company raised ' 1,372 crore of equity funds through this
IPO. Under his administration, IDFC Limited had astounding development and ended up one of the main foundation
players in India. In

Also, in 2007, the Company took over SSKI, a prominent domestic investment bank and institutional equities firm. SSKI
was completely integrated into IDFC as IDFC Securities. In 2008, IDFC Ltd acquired AMC business of Standard Chartered
Bank in India . In 2009, IDFC Ltd became a part of NIFTY 50. In 2010, IDFC Securities was ranked 2nd in the equity league
tables by Bloomberg. IDFC ranked among the top 50 companies in India’s S&P ESG Index. Also,the Company raised ` 2,654
crore of equity capital through QIP at ` 168 per share. In 2011, IDFC Mutual Fund was ranked as one of the top 10 mutual
funds in India by AUM. In 2012, IDFC Ltd completed its 15 years of operations and got recognised as best NBFC for
Infrastructure Financing

IDFC Limited displayed an good growth in infrastructure financing and diversified well in broking, institutional equities,
private equity, alternate assets and mutual fund in the 15 years of operation. The Company’s capability to tap global as
well as Indian financial resources made it the recognized expert in infrastructure finance. But around FY2013-14, India
started experiencing issues in the infrastructure segment and the growth slowed down, along with the policy paralysis.

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Keenly observing this trend, IDFC Ltd wanted to pivot itself into a bank and diversify more into the retail banking
businesses.

Company Profile: IDFC Bank

IDFC gets a banking licence

IDFC Bank applied for a commercial banking licence in 2013. Owing to the efforts of the Company under the leadership of
Dr. Rajiv B. Lall, in 2014, the Reserve Bank of India (RBI) granted an in-principle approval to IDFC Limited to set up a new
bank in the private sector. Thus erstwhile IDFC Bank was created by demerger of the infrastructure lending business of
IDFC to IDFC Bank in 2015. The parent entity, IDFC Limited, retained businesses of AMC, Institutional Broking and
Infrastructure Debt Fund business through IDFC Financial Holding Company Limited (NOFHC).
The shares of erstwhile IDFC Bank Limited were listed in the exchanges in November 2015. During the subsequent three
years, the bank developed a strong framework including strong IT capabilities and infrastructure for scaling up banking
operations. The Bank introduced efficient treasury management system for its own proprietary trading, as well as for
client operations.

Company Profile: Capital first

Capital First Ltd. was an Indian NBFC  providing debt financing to small entrepreneurs, MSMEs (Micro, Small and
Medium Enterprises) and Indian consumers. Capital First was founded in 2012 by V. Vaidyanathan.

The company was listed on NSE and BSE. The market cap of the company grew from ₹ 7.81 billion (31 March 2012) to
₹60.96 billion (31 March 2018)[5][6][7]

Road leading to merger

EVENTS LEADING TO THE MERGER in January 2018- At IDFC Bank side.

The shares of Erstwhile IDFC Bank Limited were listed in the exchanges in November 2015. During the subsequent years,
the bank developed a strong and robust structure including strong IT capabilities and infrastructure for scaling up the
banking operations. The Bank designed efficient treasury management system for its own proprietary trading, as well as
for managing client operations. The bank expanded from being a predominantly infrastructure financier to wholesale
banking operations. Since a large portion (90%) of the bank was infrastructure and corporate loans from IDFC Limited
until 2017, the company put together a strategy to retailise its loan book. Retail required specialised skills for the
marketplace, seasoning, and scale for profitability, the Bank was looking for a retail lending partner who already had
scale, profitability and spec alized skills, to merge with.

EVENTS LEADING TO THE MERGER in January 2018- At Capital First side

Between March 31, 2010 to March 31, 2018, the Capital First’s Retail Assets under Management increased from Rs. 94
crores to Rs. 25,243 Cr. Capital First financed 7 million customers through new age technology models. The credit rating
increased from A+ to AAA. The Gross and Net NPA reduced from 5.28% and 3.78% respectively to 2% and 1%
respectively and the asset quality remained consistently high. Further, the company turned around from losses of Rs. 30
crores and Rs. 32 crores in FY 09 and FY 10 respectively, to Rs. 327 crores by 2018, representing a 5 year CAGR increase
of 39.5%. The loan assets grew at a 5 year CAGR of 29%. The ROE steadily rose from 2.5% in 2013 to near 15%. The
market cap of the company increased ten-fold from Rs. 770 crores on in March 2012 at the time of the LBO to over Rs.
7900 crores in January 2018 at the time of declaration of the merger. Funding could be a constraining factor for continued
growth, so capital first was looking out for a banking license.

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IDFC Bank being a wholesale funded bank and Capital First a retail lender. In the light of rising interest rate scenario, it
would also lower the cost for Capital First since it is merging with a bank compared to other standalone NBFCs who could
see their cost of borrowing go up.

As part of its strategy to diversify its loan book from infrastructure, the bank was looking for a merger with a retail
finance institution with retail finance institution with adequate scale, profitability and specialized skills.

Capital First, in the meanwhile, was looking for a banking license in order to access large and low cost pool of funds for
growth .

The Founding of IDFC FIRST Bank..

In January 2018, IDFC FIRST Bank and Capital First announced that they had reached an understanding to merge with
each other and shareholders of Capital First were to be issued 139 shares of the merged entity for every 10 shares of
Capital First.

Figure 1

The CCI approved the transaction in March 2018. The RBI approved the transaction in June 2018. Shareholders of IDFC
Bank approved the merger with an overwhelming 99.98% votes in favour. Capital First shareholders too approved the
merger with an equally overwhelming approval rate of 99.9%. Such approval rates for a merger were unprecedented for
merger of listed companies in India. Mr. Vaidyanathan, who was the Chairman of Capital First prior to the merger, was
appointed the first Managing Director and CEO of the new combined Bank, IDFC FIRST Bank.

Why Win –Win Situation-Benefits for both?

Building a Better, Stronger Bank Mergers can be complex but the Bank has endeavored to make it smooth and easy for its
customers. IDFC Bank and Capital First merger has created an extensive banking franchise as IDFC FIRST Bank which
combines erstwhile IDFC Bank’s retail liability franchisee, huge branch network and online digital banking with Capital
First’s new approach to retail lending, distinctive credit underwriting, and a healthy financing model for the under-
penetrated, yet high-potential, market segments. The Bank now has a portfolio that spans the entire spectrum of retail
banking, backed by analytics and technology-enabled platforms. It is thus exceptionally positioned to finance the growing
aspirations of individual.

Opportunity to build robust banking franchises IDFC first bank, post receiving the universal bank license, was struggling
with execution and growth owing to a relatively weak retail assets & liabilities platform. However, in past 2 years, it has
invested in franchise rolling out 110 branches, building customer base of >1.8mn, introducing retail products, technology
initiatives, etc. CapF, under Mr. Vaidyanathan’s leadership, has a strong track record of building a retail asset base of

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>INR200bn with customer base of >4.5mn. Not only does this merger give CapF management access to a bank platform
towards early part of the life cycle, it also gives an opportunity to build a robust banking franchise on IDFCB’s existing
platform. Besides, CapF’s product mix and customer profile fit well into the banking fold and will have access to low cost
funding avenues. The only monitorable will be ramp up of liability franchise current account and saving account.

In immediate term, benefits flow more to CapF* (*capital first)

Given the retail lending franchise that CapF brings to the table along with core management team, it is valued at
INR938/share (12% premium over CMP), implying 3.1x FY19E BV. However, for IDFCB, it entails dilution of 40%. With
IDFC’s holding in IDFCB getting reduced to 37.5%, IDFC will require infusion to take its shareholding around 40%.

IDFC Bank +Capital First=IDFC FIRST Bank(Key Strength)

Following are the key strengths of the merged entity-:

• Strong Loan assets of more than Rs. 104660 Cr

• 34.6% of loans in retail segment
• Margins increased from 1.75% on standalone to 3.35% post merger
• Diversified asset profile
• Strong platform to grow retail deposits and CASA
• A large retail customer base of more than 70 lakhs live customers including 30 lakhs rural customers

Figure:2
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Figure 3

Figure 4

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Figure 5

Competitor analysis

The banking industry in which IDFC First bank is operating is highly competitive.At present there are 22 private sector
banks, 19 PSU banks, 10 small finance banks, co-oprative banks,RRBs ,7 Payment banks .Some of the well-established
competitors of IDFC First bank are-

1. HDFC Bank
2. SBI
3. ICICI Bank
4. Axis Bank
5. Kotak Bank
6. Indusind Bank
7. Bandhan Bank…and many more

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What lies ahead: Will IDFC FIRST bank be able to overcome the challenges?

Retail Banking:

IDFC Bank and Capital First ltd merger created an extensive banking franchise as IDFC FIRST Bank which combines
erstwhile IDFC Bank’s retail liability franchisee, branch network and digital banking with Capital First’s innovative
approach to retail lending, distinctive credit underwriting, and a dtrong financing model for the under-penetrated, yet
high-potential, market segments. The Bank now has a portfolio that straddles the entire spectrum of retail banking,
backed by analytics and technology-enabled platforms. It is thus uniquely positioned to finance the growing aspirations of
individuals, entrepreneurs and small businesses. The Bank’s simplified digital channels and an innovative product range,
bode well for growth in a highly competitive market. Hoewever , the bank here will face tough challenge from the already
established Pvt sector banks and well as newly licensed small finance banks.

Distribution

The Bank significantly expanded its retail footprint in FY19, adding branches and bankers to serve customers better. As
of March 31, 2018 the erstwhile Bank had 149 branches out of which 102 branches were in the rural areas and 48
branches were in the urban areas. During the financial year ending March 31, 2019, 92 new branches were opened across
the country. As of March 31, 2019, IDFC FIRST Bank has a branch count of 241, out of which 132 branches are in the
urban areas and 109 branches are in the rural areas. The branches in the urban areas are primarily focussed on
increasing the retail liability base of the Bank. The Bank also increased the number of ATMs from 114 (including white
label ATMs) as of March 31, 2018 to 141 as of March 31, 2019. Apart from this network, the Bank also has 101 asset
servicing branches primarily in the urban areas which have been acquired through the merger with Capital First Limited.
For catering to our rural customers, IDFC FIRST Bank also has 354 business correspondence branches through its wholly-
owned subsidiary IDFC FIRST Bharat Limmited

Deposits:

Making relationships count A slew of initiatives in FY19 enabled customers to make most of their Savings Accounts and
Fixed Deposits with us. IDFC First Bank made savings a lot easier and encouraging by offering an interest rate of 7.5% p.a.
on the Savings Account for balances upwards of ` 1 Lakh. For balances below ` 1 Lakh, the Bank offers interest rate of
6.5% p.a. This competitive banking proposition has helped garner significant growth in deposits from an existing
customer base as well as new customers. The Bank remained committed to nurturing relationships and creating an
exceptional customer experience, through digital solutions and personalised guidance and advice. Over the next few
years, we want to be the first bank customers think of in every step of their financial lives.

Retail Loans:

Following the merger, the Bank now offers a vast range of retail loans to make the process of securing a loan, hassle-free,
fast and convenient.

The Bank’s credit risk assessment is based on a mix of physical underwriting and analytics as well as broader sources of
information about customers. This has made it possible to speed up credit decisions and disburse loans The merged entity
expanded its retail lending operations during the year and has cumulatively financed over 7.2 million customers, and has
built a retail loan portfolio of ` 40,811 crore, as on March 31, 2019. Under the broad umbrella of retail loans, the Bank
offers products and services for the Consumer Segment, MSME Segment and Rural Segment.

Opportunities & Outlook

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IDFCFIRST Bank recognizes the huge opportunity the country is going to produce. The economy is poised for sustainable
growth which would be led by technology-driven initiatives, policy intervention, financial inclusion and consumption led
business models. After the merger with erstwhile Capital First, which had a successful growth story as a retail-focussed
Non-Banking Financing Services, IDFC FIRST Bank now has the strong business model with seasoned businesses,
excellent asset quality, distribution framework, effective underwriting and risk management systems, technology-based
origination and monitoring, efficient collection framework for catering to this vast opportunity, especially banking and
financing requirement of the aspiring consumers and emerging entrepreneurs in India. The Bank also recognises the
enormous opportunity for financing the aspiration and growth of rural consumers and entrepreneurs. With the
technology and analytics driven approach and increasing distribution network, the Bank, in its renewed form, looks
forward to a healthy growth of its retail financing portfolio in the coming years. Although the deposit base growth of the
Industry has been low in recent years, it still offers a great opportunity for growth in case of the new-age private banks
with offerings of better interest rate for deposits, excellent customer-centricity, convenience of operations and
technology-led services in a growing economy where the banking habits of the customers are continuously improving.
The Bank also has the opportunity to provide technology enabled solutions in treasury, forex, payment solutions,
transaction banking, cash management services and credit to its corporate customers. The recent turmoil driven by rising
credit default risks from some of the large corporates in India has shattered the corporate credit environment and debt
capital market in the country.

Can IDFCFIRST bank survive the turmoil in financial sector?What should be the stratergy?

Yes Bank, Il &FS, DHFL, Reliance Capital,PNB….what happened?…...

For the full financial year 2018-19, IDFC First Bank posted a net loss of ₹1,944 crore as compared to a net profit of ₹859.3
crore. IDFC First Bank also posted net loss of ₹218 cr in Q4 FY19.

The biggest task for the merged entity will be scaling up the liability base to be able to enjoy the lower cost of funds as a
universal bank. Capital First, being a non-banking finance company, currently does not have access to low-cost liability
(read CASA).IDFC Bank has also been struggling to garner a favorable liability base since its de-merger from the parent,
IDFC. Deposits form only 38 per cent of IDFC Bank’s borrowings and the current and savings accounts ratio is 8.1 per
cent.Further, the retail and SME loan book of the merged entity will get restricted to 48 per cent (balance being
wholesale), according to financial advisory services firm Jefferies.

IDFCFirst Bank, which is more dependent on wholesale lending as of now, has been struggling to grow its retail loan book
as well. The bank’s retail portion of funded credit book is only 27.5 per cent, while 92 per cent of Capital First’s AUM
comprise retail loans like loan against property, SME loans, two-wheeler and consumer durable financing.

Meeting priority sector lending requirements (30-35 per cent of Capital First’s portfolio qualifies for PSL), employee/key
management exits, cultural synergies, timely execution and desired benefits are other risks to the merger.

However, synergies in terms of loan book, branches, employees, cost and customer base will wash out all the concerns but
only in the long term. The combined entity will have a customer base of five million with an enviable distribution network
of 194 branches, 353 dedicated BC (business correspondent) outlets and over 9,100 micro-ATMs.

IDFC First bank has started targeting growth of retail Assets: • The Bank plans to grow retail loan assets from Rs. 36,235
Cr (December 31, 2018) to over Rs. 100,000 Cr in the next 5 years • The Bank plans to wind down loans to infrastructure
to NIL within five years ( Rs. 22,720 as of 31 December 2018). • The Bank plans to reduce the total Wholesale loan assets
(including the Infrastructure Loans) from Rs. 56,810 Cr (December 31, 2018) to Rs. 40,000 Cr by March 2020 in order to
rebalance and diversify the overall Loan Book. Thereafter, the Bank plans to maintain it at

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Diversification of Assets: Loan book of the bank needs to be well diversified across sectors and a large number of
consumers. The Bank plans to increase the retail book composition from 34.62% to 70% within 5 years and set the target
to take it to 80% thereon. • Gross Yield Expansion: As a result of the growth of the retail loan (at a relatively higher yield
compared to the wholesale loans), the gross yield of the Bank’s Loan Book was initially guided to increase from 9.2% (as
per Q2-FY19, pre-merger) to more than 12% in the next 5 years

Liability Strategy • CASA Growth: This is a major area for the bank. The Bank plans to enhance the CASA Ratio from
10.4% as of December 31, 2018 on a continuous basis year on year and strive to reach 30% CASA ratio within 5 years, and
increase it to 40-50% from there on. An array of digital savings & current accounts are planned to be offered to the
customer base (more than 7 million customers) of Erstwhile Capital First.

• Diversification of Liabilities: The Bank should focus on Retail CASA and Retail Term Deposits in order to diversify the
liabilities of the bank. As a percentage of the total borrowings, the Retail Term Deposits and Retail CASA is proposed to
increase from 8.0% as of December 31, 2018, to over 50% in the next 5 years and set up a trajectory to reach 75%
thereafter. • Branch Expansion: In order to grow Retail Deposits and CASA, the bank plans to set up 600-700 more bank
branches in the next 5 years from the branch count of 206 (as of 31 Dec 2018). This would be suitably supported by the
attractive product propositions and other associated services as well as cross selling opportunities.

Profitability • Net Interest Margin: The bank plans to enhance the NIM to about 5.0% - 5.5% in the next 5 years based on
better cost of funds and by meticulously selecting the product segments where we have strong proven capabilities over
the years. • Asset Quality: Over 90% of the Retail Book of the bank constitutes of loan book from erstwhile Capital First.
The book is seasoned over 8 years across business and loan cycles and has had stable performance throughout, and has
been adequately stress tested across significant events such as high interest rate cycle (2010-2014), high inflation rate
cycle (2010- 2014), Demonetisation (2016, where over 86% of the cash of the country was withdrawn overnight), GST
implementation (2017, which changed the business environment and methods for MSMEs) and yet asset quality
remained high over the period. • Cost to Income: The Bank plans to improve Cost to Income ratio to ~50-55% over the
next 5 years, down from ~80% (post merger results, Quarter ended December 31, 2018) • ROA and ROE: With the
improvement in the NIM and cost to income ratio, the bank aims to reach the following benchmarks in the next 5-6 years.
• ROA of 1.4%-1.6% • ROE of 13%-15%

Notes:

1.Annual Report of IDFC First Bank.

2.www.moneycontrol.com

3.www.bse.com

4.www.nse.com

5.www.Idfcbank.com

6.www.rbi.org

& Teaching Notes-prof Monica Singhania

Abstract

Title: IDFC First: Merger of IDFC bank and Capital First:A win- win preposition?

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Subject Area: Banking , financial, services and insurance(BFSI) sector, Mergers and acquisitions, Financial forecasting ,
and business strategy. The case provides valuable insights on challenges faced in the merger of a NBFC with a Bank.

Study Level/Applicability: The case is suitable for the following courses: post graduate programs in entrepreneurship;
executive training programs for middle and senior level employees; and MBA/post graduate programs in management in
strategic management.

Overview:

The case deals with the merger of IDFC Bank with the retail/SME financier, Capital First . Strategically, whether the
merger was in the right direction to achieve stated intentions of both entities: a) IDFC Bank: "Retailising and expanding"
its business; and b) Capital First: Transformation to “Universal Bank”? Whether this merger will be synergistic, value
accretive and provide an opportunity to the management to build a robust banking franchise? These are some of the
pertinent questions the authors will try to answer in this case study.
IDFC FIRST Bank is founded by the merger of Erstwhile IDFC Bank and Erstwhile Capital First on December 18,2018. Mr
Vaidyanathan, who was the Chairman of Capital First prior to the merger, was appointed the first Managing Director and
CEO of the new combined Bank, IDFC FIRST Bank.

Expected learning outcome: This case study would help us in understanding the working of financial institutions,
requirement of mergers to gain on positives of each other, business strategies, carrying SWOT analysis to identify
strength, weakness, opportunity and threat of a company. Exemplifying PEST analysis, Porter’s Five Forces , Swap ratio in
merger, the BCG matrix. Quantitative terms like Long-Term Return on equity, Return on Capital Employed, Book Value,
P/E ratio, EPS, Net Margins. Understanding of financial sector terminology such as Bad Debts, Non- Performing
assets(NPA) ,Gross and Net NPA’s , Provisions .Role of Regulator as Reserve Bank of India, Competition commission of
India(CCI) ,SEBI etc.

Supplementary Materials: Website of RBI , Business standard , Economic Times Reports & Other Business Journals
,Money control Website, BSE,NSE website and IDFC FIRST banks website. Balance Sheets & Annual. Reports of both the
companies

Practical Implications- A look at the performance trends of such companies over the past years too would help them in
their quest by assisting them to get an idea of business and the industry profile in which IDFCFIRST bank is operating

Social Implications -– Analyzing Banks and Banking industry involved in economic contribution in the country, their
performance, challenges and efficiency in pre-liberalization era and post-liberalization era, and identifying how many are
visible today, including the reasons for their growth/decline in generating revenues and profits, has multiple social
implications especially for an emerging economy like India – Analyzing Banks and Banking industry involved in economic
contribution in the country, their performance, challenges and efficiency in pre-liberalization era and post-liberalization
era, and identifying how many are visible today. including the reasons for their growth/decline in generating revenues
and profits, has multiple social implications especially for an emerging economy like India. A look at the performance
trends of such companies over the past years too would help them in their quest by assisting them to get an idea of
business and the industry profile in which IDFCFIRST bank is operating.

Discussion questions with solutions-

Q1.Carry out SWOT analysis for IDFCFIRST Bank

Ans) SWOT Analysis: IDFC First Bank

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 Robust Loan Growth Focus on Retails & Corporate
Improvement in CASA Ratio Business
Improvement in Asset Quality Branch Expansion to tap more
customers

Opportunity
Strength

Weakness
Threat
Stressed Exposure (Increase in Intense Competition
NPA) Threat from Depositors, NBFCs

Q2.Develop porters 5 competitive analysis model for IDFC First Bank

Ans) Porter’s 5 Forces Model applied to IDFC First Bank:

Threat of
New
Entrant

Bargaining Industry Bargaining

Power of Power of
Suppliers Rivalry Consumer

Threat of
Substitute

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1. Threat of New Entrant:

The threat of new entrant in banking sector is high as new banks are entering in the market however due to
large proportion of new banks failure and few mergers (IDFC-Capital First merger), the average count of banks
are reduced.

The factors that impact the new entrant in banking sector are:
1. Low confidence of customers on new bank
2. Customers already have engaged with some bank on their preferences.
3. Rules, regulations for licensing are not easy.

The threat can be more prominent when new Entrant offers:

1. Very good banking services with high interest rate.

2. Reaches out to potential customers in unreachable areas by expanding network

2. Bargaining Power of Supplier:

Capital is main resource which are derived from Customer deposits, securities, mortgage and loans. The Power
of suppliers (Consumers depositing money in bank, interest generated of loans or mortgages) depends upon
market. The bargaining power of Customers increases with more options available to him/her.

3. Bargaining Power of Buyer:

Potential customers bargaining Power increase with increase in knowledge/ information of banking sectors,
various offers that financial institutions provide to potential customers, need or convenience of the customer.

4. Threat of Substitution:

The major threat of substitution lies not only from rival banks but from non-financial institutions such as
insurance, mutual funds, fixed income securities and stock exchange. As these non-finance institutions offer
potential customer of better returns or financial security in future, the potential customer is entice to invest in
these resulting less exposure to bank. Threat of substitution also depends on risk taking attitude of customer,
interest rate of loans and payment methods.

5. Industry Rivalry:

The various options available with customer has made banking industry highly competitive. Each bank is
offering better services and quick response to customer. New banks are also offering higher interest rates on
deposits and investments, more convenience in a bid to shift customers from their rival banks.

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