“There are decades when nothing happens, and there are weeks when decades happen.” This famous political saying sums up the current state of activities in the financial services sector.

Some of the deals that have happened so far in the last six months were spoken about for many years. But it didn’t happen for reasons best known to the companies. Now, they are unfolding one after another, so much that it seems like deal activities in India’s banking and financial services industry (BFSI) space is moving at breakneck speed. There are large scale mergers, consolidation, acquisitions for growth opportunities, and progress in age-old disinvestment plans.

It all started with the merger of five-decade-old Shriram Group companies late last year. In December, Shriram Capital, the holding company of the Shriram Group, and Shriram City Union Finance, merged with Shriram Transport Finance Company to form India’s second largest NBFC, Shriram Finance.

Even before the industry could absorb the merger, the country saw its biggest ever deal announcement in the financial service space – the coming together of a father and son. India’s largest private bank, HDFC Bank, completed its merger with Housing Development Finance Corporation (HDFC), the country’s largest mortgager, in a $40 billion all-stock deal on July 1. The deal puts India on the global map as the merged entity is now the world’s fourth largest bank.

That’s not all. YES Bank is looking to acquire a microfinance company this fiscal, while a scheme of amalgamation was announced to merge IDFC Ltd and IDFC FIRST Bank earlier this month. This reverse merger of the holding company with the bank has been contemplated several times in the past, and finally happened two years after the central ratified it.

Thankfully, the disinvestment process of IDBI Bank is moving in the right direction with the government keen on closing the deal in the current fiscal. Public sector major Bank of Baroda also approved divestment of up to 49 per cent stake in its credit cards subsidiary, and is in the process of finding a buyer for Nainital Bank.

Vivek Iyer, Partner, Grant Thornton Bharat, says the stressed balance sheet problem of the banks in the last few years has held back the entire BFSI ecosystem.

Inorganic appraoch’

“With the asset clean-up done and the stressed balance sheet problems behind them, the BFSI space is looking to grow through various inorganic approaches to make up for the lost time”.

But what still explains such a heightened culmination of corporate action in FY24? Largely, deals happen for three reasons — improved business synergies, a mandatory consolidation in the sector to move up the pecking order, or simply to chart an exit to investors.

Interestingly, the current round of deals is ticking at least two out of three boxes. Here’s how:

Synergy benefits

Synergic benefit is one common thread among these large-scale mergers and acquisitions deals. Despite being a major player in retail loans, HDFC Bank was unable to make a dent in the home loan segment. But the merger has offered the mammoth home loan book of HDFC to the bank on a platter. It also helped the bank to diversify its loan book to mortgage and loan against property (LAP) products. Prior to merger, over 17 per cent of HDFC Bank’s loan book was unsecured, which includes personal loans and credit cards. According to a report by Prabhudas Lilladher, the merger will also give access to 25 million HDFC Group customers that do not bank with HDFC Bank and 60-70 per cent of HDFC customers do not have a liability relationship with the bank.

Similarly, the merger of Shriram Group companies will enable the new entity to reduce the share of commercial vehicle finance from 77.5 per cent of its loan book to around 60 per cent over the 2-3 years by diversifying into gold loans, loans against property and two-wheeler loans. It also plans to enter supply chain financing.

Consolidation

Consolidation is another major theme that is at play with all these large deals. The Shriram Group merger created an entity with a loan book size of ₹1.71-lakh crore on a net worth of ₹40,900 crore. Similarly, the total assets of HDFC Bank ballooned to over ₹22-lakh crore, making it the largest private sector bank by a wide margin. Large and diversified loan books means better ratings and greater ability to borrow money at reduced costs.

According to Iyer, the persistent high interest rate environment globally makes the cost of running a financial services business very high, thereby impacting margins. “Such times require volumes to make up for bottom-line, when margins don’t support businesses, thus driving consolidation,” he adds.

Exit route

The M&A action also paved the way for the exit of some of the long term investors in some of these banks. The merged Shriram Finance entity saw two big investors exiting in quick succession. Last month, Piramal Enterprises sold its entire 8.34 per cent stake in Shriram Finance via multiple block deals worth ₹4,824 crore. Private equity firm TPG India, which held about 2.64 per cent stake in the company with investments for more than severn years, also exited the company in a ₹1,389-crore deal weeks before Piramal’s exit. In January, US-based PE firm Apax Partners sold its 2.95 per cent stake for ₹1,300 crore via block deals.

The government is also looking to exit its entire stake of 60.73 per cent in IDBI Bank, which it bailed out in 2019. As on date, the government and LIC hold 30.48 per cent and 30.24 per cent stake, respectively. Bank of Baroda’s divestment of up to 49 per cent stake in credit cards subsidiary, BoB Financial Solutions Ltd, six years after Spanish Bank BBVA backed out of the deal could secure the bank exactly the kind of capital it may have to otherwise raise through a tedious process. 

Perhaps, the only exception is IndusInd International Holdings Ltd, the promoter of IndusInd Bank, looking to raise up to $1.5 billion to increase its shareholding in the bank to 26 per cent from the current 15 per cent. The stake increase is to meet the ‘fit and proper’ status of RBI guidelines on ‘Acquisition and Holding of shares or voting rights in Banking Companies’ and with this capital entering the bank, we may see its aspirational para-banking plans take off.