IBHSGFIN-LAKSHVILAS merger - Yet another transition of NBFC into universal banking license

In a strategic move, Indiabulls Housing Finance (IBULHSGFIN) has announced a merger with 569-branch strong south-India based regional bank Lakshmi Vilas Bank (LAKSHVILAS)
Why the sudden deal?
IBULHSGFIN has been vocal about its banking aspirations in order to scale up its business model. The recent liquidity challenges amid NBFC crisis tested its resilience. This catalysed IBULHSGFIN’s merger with a universal banking platform (LAKSHVILAS).  Share swap ratio of 0.14:1 (14 shares of IBULHSGFIN for every 100 shares of LAKSHVILAS) has been agreed upon by respective boards of directors. 
Management concall details
1. Deal is within the purview of existing policy framework of bank merging into NBFC/HFC or NBFC/HFC into bank. The deal is along the lines for other mergers announced between banks and NBFCs over the past 18 months such as Gruh finance & Bandhan Bank, Capital First & IDFC Bank and Bharat Financial & Indusind Bank.
2. LVB has been breaching PCA norms on most parameters. Even after the QIP issue of INR4600 cr, its CAR was only 7.95% and the bank has been reporting losses and has a net NPL ratio of 7.5%. The RBI wants to save this bank (& not let it go under the PCA framework) and be taken over by a strong player. Two RBI directors on LVB’s board supported the merger though RBI denied giving implicit approval for the merger as per press notification released on weekend.
3. IBULHSGFIN has the experience of floating a bank in London, namely OakNorth which has been scaled up well and demonstrated successful execution. It largely does SME lending and Indiabulls has two nominee directors on the board that advised OakNorth in SME financing.
4. Promoter shareholding would come down to 19.5% in the merged entity (from 21%) and will be less than 15% before the deal is executed. 
The way forward
Once shareholders approve the proposal, a 30-day process, management would apply to the RBI immediately, which is expected to come back in 4–8 weeks.  Company has conveyed that there will be no retrenchment and all employees will be absorbed. IBULHSGFIN has maintained no change in the borrowing plans for FY20, neither earnings growth of 17-18%.
The author may have positions in the stocks as mentioned in the article above, please assume us to be biased. This is not a recommendation to buy or sell securities. This is purely information about the company mentioned.  Equity investing contain risks and please consult your financial adviser for any buy and sell securities!

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