A banker at par, ex ED of ICICI Bank and being a board member for the same and a Citibanker prior to that; it must be a Deja Vu moment for Mr. Vadiyanthan as he is set to become the MD & CEO of the merged entity of IDFC bank and Capital First. Cant be in safer hands!
Known for his business aggression and acumen, VV was instrumental in roping in PE firm Warbug Pincus and leapfrogging erstwhile wholesale financing driven Future Capital with AUM of less than 200 million to a retail centric Capital First with AUM over 3 billion. Focusing on MSME sector, it is no mean achievement that it has a very healthy NPA at < 1% and also has a good profit margin (cost to income hovering near 50%). The merger now will see him seeing the full circle returning at the top helm of a bank which will be nearly 60% of IndusInd bank currently and hence giving him an opportunity to rerun the magic this time to start breathing over the shoulder of the midsize banks (e.g. KMB, IndusInd etc.) before sneaking closer to the larger players.
The merger augurs well as the portfolios are hardly overlapping with Capital First primarily retail focused with Loan against property, consumer durable loans and 2-wheeler loans forming the portfolio while IDFC bank with less than 2% revenue coming from retails finding it difficult to come out from its erstwhile investment banker days! Also Capital First with its strong presence in MSME sector provides a complementary portfolio to IDFC bank and hence the merged entity gets to have a larger horizon and not necessarily just an additive effect on the P&L statement. Culturally also, the merger is not expected to throw lot of challenges which was otherwise one of the largest concern we highlighted in the earlier proposed merger of Shriram group and IDFC bank (read here). The other advantage that this merger has compared to the earlier proposed is that Capital First has a very tight physical light presence unlike Shriram group especially after the earlier winded off its gold loan business and hence there are slim chances of rationalization becoming a impending need. What Capital First also gains out of this exercise is lower cost of funds which generally comes with bank (low cost deposits e.g. CASA).
While it may have been Mr. Vaidyanathan’s aspiration to grow Capital First exponentially, it may not have been easier in future without foraying into banking. Getting a full fledged banking license under RBI on-tap license was not a feasible option at this current stage and hence the merger opens that door for him. The best part is that he is an experience banker with a enviable experience of a technology backed startup, leaving him very uniquely placed to lead this new age bank at a time when technology led innovation is disrupting and transforming the banking sector.
Will there be challenges? Possibly yes.
- People challenges? Managing the aspirations of the 2 sets of employees he is going to inherit, ensuring retention of the key leaders/ talents across both the entities, distribution of portfolio.
- Regulatory hurdles? Does not look like except that Warbug Pincus will need to let go a small %age of its share to ensure its stake in combined entity remains within 10% regulatory limit. Also capital requirement e.g. CAR, SLR will need to be maintained for the combined entity but that does not look like a challenge as Capital First is well capitalized
- Cultural challenges? Does not look like as both are Mumbai based with new age employees forming the core
- Technology challenges? Difficult to predict without knowing the current technology stack of these entities. But Capital First does not seem to have invested in any core banking solution and hence that’s a big sigh of relief. Probably core technology stack of IDFC bank will continue to exist while CF surround technology may coexist for sometime.
To summarize, while we have been very circumspect on the earlier news of Shriram group and IDFC bank merger, we are much more positive on the Capital First- IDFC bank merger and we can be assured of more interesting times in days to come as Mr. Vaidyanathan takes a firm grip on the merged entity. Private banks- watch out!
Capital First Annual report FY17
IDFC Bank Annual report FY17
Capital First Investor Presentation