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Stock pick of the week: Why analysts are bullish on IDFC Bank

Merger with Capital First will help IDFC Bank gain exposure to newer market segments, boost its branch network and help boost the bank’s growth.

, ET Bureau|
Updated: Jan 29, 2018, 12.25 PM IST
Merger with Capital First will increase the bank’s branch network and diversify its asset base.
IDFC Bank reported lacklustre numbers for the third quarter of 2017-18. Its revenue and net profit for the quarter fell 15% and 24% respectively, year on year (y-o-y).

Despite this, analysts have been getting increasingly bullish on IDFC Bank because of its proposed merger with Capital First as it will offer the bank several new growth opportunities.

IDFC Bank, which had inherited the wholesale banking network and infrastructure loans from IDFC, has been looking to get into retail banking since its birth in 2015. Its merger with Capital First will help it get this retail exposure. Due to its continued focus on expanding its branches, IDFC Bank now has a network of 127 branches and a customer base of 23 lakh, as of December 2017.

Buy: 8
Sell: 2
Hold: 4

With the merger and continued branch expansion, the total number of branches of the merged entity, across 35 cities, are expected be around 350 by March 2018. IDFC Bank will also be able to market deposit products to the erstwhile Capital First customers and this should help the merged entity ramp up its retail deposit base. It’s noteworthy that CASA (current account and savings account) constitutes just 10% of IDFC Bank’s total deposits, as of December 2017.

Increased retail loans is a major positive aspect of this merger. Around 45% of the merged entity’s loans will be retail, compared to IDFC Bank’s current 28%. This will help the bank reach its target of 60%retail loan book by 2021. The merger will also widen IDFC Bank’s loan base and help achieve higher diversification. Capital First, which was mostly catering to the MSME segment, will help the new entity access several segments. Since there is not much duplication of assets between the merging entities, the issues usually associated with a merger are likely to be few.

The shareholding of the IDFC Bank’s parent, IDFC, will come down from 53% to 38% after the merger. Since IDFC has to maintain 40% holding according to regulatory requirements, it will increase its stake later—either through fresh equity or by buying shares from the market. The combined entity has enough capital to grow at around 20% for the next 2-3 years without further equity dilution. Analysts are also thrilled that V. Vaidyanathan, Chairman and MD, Capital First, will be taking over as MD and CEO of the new entity. Besides Capital first, he has proved his capabilities at ICICI Bank and his aggressive style should help IDFC augment its retail segment.

Performance of IDFC bank compared with the Sensex. Stock price and index values normalised to a base of 100. Source: ETIG database & Bloomberg

Selection Methodology
We pick the stock that has shown the maximum increase in ‘consensus analyst rating’ in the past one month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search is restricted to stocks that are covered by at least 10 analysts. You can see similar consensus analyst rating changes during the past week in the ETW 50 table.

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