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IDFC Shriram Capital Merger: Opportunities & Challenges

The IDFC Shriram merger has the potential to catapult the IDFC from being a baby bank to a mid-sector bank but the rational for Shriram capital is not very clear. Shriram capital is one of the best names in NBFC sector and is larger than IDFC bank but what may have pushed Shriram is their inability to get a banking license despite earlier attempts. The only way for their promoters was to get merged with a bank. That limits the options as the established banks may have lot of overlaps which would make the merger less attractive (geo, product, customer overlap) while among new ones only IDFC will have such a deep pocket. For IDFC it is immediate move into big league with new portfolios.

Let us first understand the different companies in the proposed merger. The 3 key players will be IDFC bank, STFC/ SCVF (Shriram Transport Finance Company- the Shriram Commercial Vehicle Finance Arm) and Shriram City Union Finance (SCUF).

Revenue & Profit Comparison (FY1617)

Profitability Comparison (FY1617)

The Shiram Capital companies has higher ROA & lower cost to income compared to IDFC bank and hence augurs well for the bank post-merger.

Geo Distribution

The extensive presence of the commercial vehicle arm and the City union finance gives 2 important edge to IDFC:

  • Immediate pan national wide presence from the current concentration of branches at MP (35), Karnataka (18) and Maharashtra (7)
  • Look for synergy in branches in a few geographies & optimize branches/ infrastructures cost

Business Distribution

  • IDFC bank is still a largely corporate centric bank with very small retail portfolio (which it is trying to expand in next 2-3 years). For example, Industry accounts for 77% of its advances in FY17 while Personal Loan (including Home Loan) accounts just a little more than 1%. Segment revenue from Retail is meagre 242 odd crores
  • Shriram commercial vehicle finance primarily targets primarily the pre-owned vehicles ageing 5-10 years. Between it & City Union finance, it has strong presence in the SME & MSME segment.
  • Overall IDFC bank will capture significant market in the SME/ MSME segment and to certain retail segments as well. The SME/ MSME segment has significant growth prospects for future notwithstanding the reversals it saw during the demonetization drive.


The commercial finance arm beats IDFC convincingly in both the customer base & the revenue per customer.

Asset Quality

While both STCF/ SCVF & SCUF are adequately provisioned for bad loans but their NPA figures can still have some worries for the IDFC bank. But with demonetization impact withering away & economy showing initial signs of recovery, this may not worsen into a bigger problem.

How will the merged entity look like? How will it compare to other banks?

This comparison is done as-is i.e. as if the merged entity will have an additive effect only. This means that gains/ pains of merger are not addressed in the current calculations.

The merged entity will be comparable to IndusInd & Kotak Mahindra bank and will be larger than both. The following chart provides a comparison of financials post-merger.

Seems that the merged entity will have better cost to income ratio. Understand, that this do not consider the additional cost benefit that the merged entity can gain by optimizing the infrastructure (branch/ offices & back office) and the employee expense (if employee base is rationalized)

The revenue per branch specifically shows opportunity for optimization.

Let us now look at some of the key pros for the merger:

  1. Leap frog for IDFC bank from a corporate centric baby bank directly to a mid-size bank of enviable book & presence across the country.
  2. The sectorial presence of the entities is complementary and expands the portfolio of offering to much larger encompassing base
  3. Access to lower cost of capital for the Shriram groups (one of the key advantage for an NBFC when it becomes a bank) and hence lower interest expense
  4. Potential infrastructure consolidation resulting in lower cost of operation for the merged entity
  5. Shiram Life Insurance which does not have a Banca presence can now leverage merged entity network for new policy acquisition. Note that Banca has evolved as the most profitable & effective distribution channel for life insurance

Now let us look at probable cons for the merger:

  1. The biggest challenge is that the benefits for IDFC bank looks much higher than what it augurs for Shriram capital especially STFC. While the promoters possibly get a good exit and a stake in bank, rest of the shareholders have little to cheer about.
  2. Shriram capital being an old organization has its own history & culture. IDFC, HQ in Mumbai, with primary origin in investment banking foray will have its own culture. These 2 set of cultures may not exactly be gelling. Employees who may have developed belongingness to Shriram capital by their long association may find the merged entity decision all not so palatable. The cultural challenge can be a spoiler. A possible reflection of the potential cultural difference is the below chart.
  3. The current leadership at IDFC bank may not have enough depth in sectors where Shriram has a strong presence and hence any exit of key management/ senior leadership of Shriram may create difficulty for the merged entity to realize the expected gain

The merger decision seems to be largely led by IDFC bank own interest to make a large foray (big bang) and help it realize a bigger play in retail & SME/ MSME segment and the promoters of Shriram capital who feels it is best time to log out of NBFC and login to a bank, the benefits for the Shriram capital shareholders, employees or its customers seems very hazy at this point of time.

While there are regulator concerns (bank cannot have an NBFC arm as STFC is expected to be a subsidiary and cannot be owning an insurance arm as well), our key concern lies with the lack of suitable driver for Shriram capital to look forward to the merger and the potential cultural gap between the two organizations. Unless handled well, these two factors can impede a successful merger and have detrimental impact on the performance of the merged entity.


Total Income: Total Income including Other Income

Operating Income: Total Income – Interest Expense

Operating Expense: Operating Expense under P&L of Company financials (does  not include Provision & write off but includes Employee expense)

Operating Profit: Operating Income – Operating Expense (excludes Provisions & Write-offs)

PBT: Profit Before Tax: Operating Profit –  Provisions/ Write-offs etc (excludes Taxes etc)

Revenue per employee/ branch: Operating Income per employee/ branch. For STCF/ SCVF branch does not include Rural centers

Cost to Income: Operating expense/ Operating Income

Per employee expense: Total Employee expense (as per company financials)/ Total employee base


Respective company annual reports, investor presentations, financials for FY1617

Shriram Life Public Disclosures: FY1617




3 thoughts on “IDFC Shriram Capital Merger: Opportunities & Challenges

  1. Sairam August 5, 2017 at 9:09 am

    Good analysis.

  2. Sairam August 5, 2017 at 9:10 am

    Good analysis

    • Randomwalks August 5, 2017 at 3:22 pm

      Thank you. Pls subscribe to us for latest news & analysis. You can also follow us on @randomwalksIn in Twitter.

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