Rather I feel the opposite. If IDFC is not charging fees for such transactions then obviously its earnings through such services is suffering. NIM is ok…Most banks have similar margins. But these services what banks earn from…Am I reading wrong?
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they can charge once they establish themselves as a brand …
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In my opinion Mr VV is aiming to attract customers by offering free services. Recently there was a big full page newspaper advt regarding payment of interest on current account, which I think no bank is doing. CASA accounts being sticky, the bank will be earning by selling other products in its basket. It is a long term strategy.
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We have to see the risk reward at all times. At 0.9x book, the bank was undervalued. At 2.35x book with 12-13% (risky highly levered ROE) we have much better opportunities IMO. Entire SFB space looks very interesting. Ujjivan specifically has been doing 4% ROA with guide of 2.5-3% ROA/20% ROE normalized FY24 with 25-30% growth.
Those who are ok with a bit lower ROE but more secured book can evaluate equitas SFB which has ? 50% in secured.
Those that want to buy an SFB which is turning around& still available near book can evaluate suryoday SFB. In short we have ample opportunities & limited capital. VV’s C/I guide keeps becoming worse over time. Earlier it used to be 55% C/I in FY25. Now its 65% C/I. To me this limits intrinsic compounding of capital inside bank. Right now, bank can grow capital at 13-14% every year. For capital raise they are at mercy of perception of markets.
From my point of selling bank (mid december), bank has grown around 25%. But my portfolio has grown much much faster & i think quality of underlying companies is equally strong if not better. So, what is the problem 
As late Mr Jhunjhunwala sir used to say
“Its a buffet. Eat what you like. Just dont overeat”
Disclaimer: Used to be invested, not invested, but tracking closely & wish nothing but great success for bank shareholders.
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Bank’s book value per share is increasing by about 4.9% as per the article. But definitely holding company shareholders benefit more.
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Since the merger is heavily skewed in favour of IDFC Ltd shareholders, is it possible that Bank shareholders can reject the merger?
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I am holding both IDFC and IDFCFB in 1:2 ratio. What is the suggested course of action if I want to maximize the profit?
Is the record date known? If not, won’t the prices of both settle down in the coming days to negate any potential disadvantage for the bank share holders?
Apologies if the question is too silly.
Trying a bit of number crunching, can someone please guide me if and where I am wrong as I seem to reach a conclusion that bank is actually at a slight gain with this arrangement.
IDFC Limited 100 shares = IDFC First Limited 155 Shares
Market Cap | IDFCFIRSTB = 54,311 Crores | IDFC Limited = 17,455.83
Premerger Outstanding shares | IDFCFIRSTB = 661.8122 Cr | IDFC Limited = 159.9984 Cr
If for 100 Shares of IDFC = 155 Shares of IDFCFIRSTB issued
so 1599984436 (total outstanding shares of IDFC Ltd) = 1599984436 * 155 / 100 = 2479975876 Shares of IDFCFIRSTB will be issued to get entire IDFC Limited
Post issue outstanding shares of IDFCFIRSTB = 2479975876 + 6618121816 (current outstanding shares) = 9098097692
Considering bank’s market cap of 54311 Crores, value of 2479975876 newly issued shares post merger = 2479975876 / 9098097692*54,311 = ~14804 Crores
So for 14804 Crores, bank is getting 2646438348 shares of IDFCFIRSTB held in IDFC, that post merger will be valued at 2646438348 / 9098097692 * 54,311 = ~15798 Crores.
So essentially bank is paying 6.3% ((14804/15798-1)*100) less than current post merger market value of its own shares held in IDFC even if we don’t consider other value (cash, etc.) held in IDFC.
So essentially bank is in slight gain. No?
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Looking at trading prices of Capital first and IDFC first bank during their merger in 2018, prices of IDFC may trade at 140-145 shares of IDFC first.
39.93% of existing equity of IDFCB will be extinguished and replaced by freshly issued shares.
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It seems the reserve on the IDFC balance sheet will be used to set off the accumulated losses. This seems beneficial to the bank. Does this go beyond the book value increase of ~5%, due to a reduction in share capital?
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This is incorrect. Upon merger the shares held by idfc Ltd in idfc FB shall be cancelled.
So you need to reduce the number of shares held by IDFC to arrive at post merger IDFC FB share capital
Regards
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The calculation is simple.
If you have 100 IDFC shares then you will get 155 IDFC FB shares.
=> 1 * IDFC share = 1.55 * IDFC FB
If IDFC FB share price stays fixed @ 109 then IDFC share price should be 1.55*81.95 = 127. => Gain of 18 rupee per share for IDFC holders.
What will happen to IDFC FB share price today?
BV will increase => IDFC FB price should also increase. However as per above calculation IDFC FB share holders will sell it to buy IDFC this may decrease IDFC FB share price and therefore the IDFC price.
EDIT: Sold my IDFC FB for IDFC ltd. Seeing fall in IDFC FB as expected.
Disc: Was invested in both, now in IDFC only.
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Assuming the current price of IDFC which is 111
Buying 1 share of IDFC simply means buying IDFC FB at 111/1.55 = 71.
Also, the no. of shares that’ll get added due to swap will be ~248cr (1.55 times the current ~160 cr IDFC shares)
The no. of shares that’ll vanish is ~265 cr (Current IDFC holding in IDFCFB) thereby net vanishing of 17cr shares. So effectively this’ll impact the book value and EPS of IDFCFB positively
Disc: Invested in both. No recommendation.
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https://twitter.com/ZeeBusiness/status/1676105552022192128?s=20
Watch this video. Mr. VV mentions the same thing in about a minute
Additionally, the bank will also get Rs. 600cr of cash from IDFC
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Thanks for correcting
So then this is even more positive then the scenario I mentioned in my previous post because now the equity base would also reduce, overall, issues lesser shares to get back higher number of shares of the bank, that seems like a way to use IDFCFIRSTB shares as a currency to buy more of its own currency in return.
In simple words (grossly oversimplified), giving away 247.99 Crores currency notes of x denomination to get back and extinguish 264.64 crore currency notes of very same denomination.
As far as people doing share price comparison, understanding the rationale of that is beyond my limited abilities. Why would people, who are focused on long term business prospects, let market gyrations define their business action (assuming investment is a business action), I feel incapable in understanding behavior. Were markets closed for good, would I pay 247.99 crore shares of a company to acquire back 264.64 crores of the very same company? I think so.
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Book value per share of IDFC First Bank goes up by around 4.9%, from 39 to just under 41. In my opinion, bank shareholders are not losing anything, and in fact are gaining slightly. The quantum of benefit is definitely more for the holding company shareholders simply because it was trading at a huge discount. So valuation wise, trailing price to book at the current market price of 79 would be around 1.92 for bank shares. For the holding company shares, at the current market price of 111.5, it would be around 1.75.
Disclosure - holding bank shares from lower levels, added holding co shares recently
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Hi
Same is the case with me. Holding IDFC and IDFC FB in 1:2 ratio. Rational mind says to sell IDFCFB shares and buy IDFC. In a sense, I would own more IDFC FB shares when the merger would happen.
But market is behaving differently. In a sense it is giving this arbitrage opportunity. Am I thinking wrong ?
Please let me know if someone has thought about it.
Thanks,
Pankit
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