Markets Resilient Despite Hefty FII Selling, Takeaways From Merger Of IndusInd Bank With Bharat Financial Inclusion Ltd
Markets Resilient Despite Hefty FII Selling
S&P BSE Sensex have run up by a good 16% since last Diwali. Now, this massive run up has been despite the hefty selling by Foreign Institutional Investors (FII) in the recent months.
FIIs have withdrawn money to the tune of Rs 464 billion during the period beginning from August-17 till date. Despite this humongous withdrawal, the markets have just corrected by 0.4% during this period.
A similar withdrawal of FII money was seen in the financial crisis of 2007-08. FIIs withdrew money to the tune of Rs 499 billion in matter of three months from November-07 to January-08. However, during this period, the benchmark index corrected by a significant 11%. Considering the above data, the benchmark indices should have corrected significantly during the recent withdrawal by FIIs.
So, the golden question. Why did the markets not correct? The answer to this has been strong domestic buying.
Mutual Funds are seeing massive inflows. The inflows in mutual funds in FY17 at Rs 3.43 trillion were 155% higher as compared to a year ago. Post demonetization, the shift to mutual funds have been noteworthy.
There are a few reasons for this sharp jump. After depositing their monies into banks, as a part of the government's drive to replace high denomination currency notes, there were limited attractive investment avenues. Returns on bank deposits have hardly been sufficient after considering the effect of inflation. Even gold and real estate turned out to be unattractive as there has been no clear sign of price improvement in the near future. HNIs and institutional investors, which predominantly invests in real estate, gold and fixed deposits, have now started investing in mutual funds given the higher returns than most traditional investment avenues. And this trend has sustained in the current fiscal year.
Currently, excess liquidity is driving the markets to new highs. However, earnings growth in the coming quarters would be the key things to watch out for. Sensex is trading at a price to earnings (P/E) multiple of 24.3 times and has already started to look expensive. If the earnings do not catch up, the p/e multiple could further shoot up leading to a significant correction in the equity markets.
What does the Merger of IndusInd Bank and Bharat Financial Inclusions Ltd Hold for its Shareholders
The much talked about merger between <>IndusInd Bank and <>Bharat Financial Inclusions Ltd (BFIL) has finally materialized.
The shareholders of BFIL would get 0.639 shares of IndusInd Bank for every share held. This implies a premium of around 12.6% to BFIL's two-week volume weighted average price.
Synergies from the Merger
- The company expects the cost of its funds to reduce by around 3%. They expect a huge spurt in deposits on account of this acquisition as the merger would give IndusInd access to BFIL's clients, in-turn helping the bank to pitch to BFIL's 6.8 million members. The current account, savings account (CASA) deposits which are low cost deposits could increase significantly on account of this, in-turn reducing the cost of funds for the company.
- IndusInd Bank could cross sell its products such as home improvement loans, two-wheeler loans, personal loans to the clients of BFIL Limited.
- The yields on advances at an overall level could increase, in-turn leading to higher net interest margins. BFIL, being in the business of micro-finance lending enjoys higher yields. As of June 2017, the gross yields of BFIL stood at 19.7% as compared to IndusInd which stood at 11.5%. Hence, the overall return ratio of the banks could improve.
Having said that, the business of micro-finance lending institution has got impacted significantly post demonetization. Post demonetization, BFIL's asset quality has deteriorated significantly. Gross non-performing assets (GNPAs) have deteriorated to 6% during the June 2017 quarter as compared to a mere 0.1% in the same quarter in the preceding year.
Asset quality is a concern and IndusInd bank's asset quality could deteriorate on account of the takeover of this business.
Talking about valuations, IndusInd Bank seems to have overpaid quite a bit to acquire BFIL. The acquisition has taken place at a price-book value of over 6 times. Whereas, Kotak Mahindra Bank and IDFC Bank acquired microfinance businesses at 1.9-2 times the trialing book value.
The shareholders of BFIL are definitely going to benefit from this merger, which is very evident in the movement of the stock in yesterday's trade. The stock closed the day trading higher by 1.6%.
While, this deal seems to be negative for Indusind Bank shareholders mainly on account of the high valuations and the stock has closed the day trading lower by 1.9% in yesterday's trade.
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