Losers in bank licence race take a knock, fall up to 9%

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Shares of most banking licence aspirants, who failed to make the cut, slumped on the Bombay Stock Exchange on Thursday. Even shares of IDFC, which received RBI nod to set up a bank, were volatile and closed 2.38 per cent lower at Rs 124.95 after rising 8.7 per cent to Rs 139.15 in the opening move.

Those counters that suffered losses included LIC Housing Finance (1.37 per cent), Aditya Birla Nuvo (2.35 per cent), Reliance Capital (4.51 per cent), L&T Finance (9.71 per cent), Bajaj Finserv (0.78 per cent), Shriram Transport Finance (4.13 per cent). Srei Infrastructure Finance (7.80 per cent), Muthoot Finance (2.56 per cent), J M Financial (7.68 per cent), IFCI (8.51 per cent), Indiabulls Housing Finance (1.52 per cent), Magma Fincorp (4.57 per cent), Religare Enterprises (0.39 per cent), IIFL Holdings/India Infoline (3.64 per cent) also booked losses in day's trading.

But Edelweiss Financial Services bucked the trend and gained 5.24 per cent. The other company to receive licence from RBI, Bandhan Financial Services, is not listed.

Kashyap Jhaveri, research analyst at Emkay Global Financial Services, said: "We estimate that IDFC's return on assets (RoA) after becoming a bank will come down from 290 basis points to 150 basis points post the SLR, CRR and PSL requirements and further to 120 basis points including higher costs."

However, it would help IDFC diversify from single product wholesale financing company to a more consumer centric bank, he said.

Suruchi Jain, equity research analyst at Morningstar India, said, "We believe the licence will give IDFC three key benefits. First, it will allow the institution to operate with lower capital adequacy requirements, thereby allowing it to undertake higher leverage, or grow its assets to several more times its underlying equity, resulting in higher returns to equity."

"Secondly, this will enable IDFC to lend to sectors other than infrastructure, ensuring that it is less vulnerable to economic cycles and downturns in one particular sector, through this diversification.

Lastly, with this deposit-taking bank licence, the company will be able to raise deposits from existing clients as well as retail clients, bringing down its overall cost of funds, as it will rely less

on debt funding, like it has in the past."

Although IDFC will have to make significant investments in terms of

branch expansion, hiring talent, and setting up back-end processes, we

are optimistic about the firm's future prospects with the license in

hand, Jain said.

Adarsh Parasrampuria, research analyst-Institutional equities at

Prabhudas Lilladher, said, "Our analysis of IDFC's return ratios after

5-6 years of transition pain indicates that RoEs (Return on Equity) at

best could move back to 11-14 per cent levels, factoring in some

success on CASA mobilisation."

He said IDFC's RoEs could come back to 11-14 per cent by 2020-21 after

dipping to single digits in the first 3-4 years. "We believe the

benefits of the positives like ability to leverage, raise CASA

deposits and earn non-fund based fees will not outweigh the negatives

of CRR/SLR, PSL compliance and significant increase in operational

expense, though it does provide some more sustainability to IDFC's

current wholesale model," Parasrampuria said.



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