MUMBAI: The Hinduja family backed IndusInd Bank is looking to raise as much as $500-750 million “confidence capital” from marque global investors to soothe investor nerves frayed by worries over rising bad loans due to the Covid-19 outbreak and outflow of about a tenth of its deposits after the collapse of Yes Bank.
The private lender, arguably the worst hit bank stock, since the Coronavirus outbreak, has mandated Morgan Stanley and Citi to tap a handful of PE funds, people close to the development added. Global funds such as Blackstone, Apax Partners, General Atlantic (GA), Advent, TPG — who has been a successful investor in the bank – Carlyle among others have been approached. Other bidders are also expected to join. The bank’s current market cap is Rs 23,739.73 crore ($3.2 bn).
Sources said the promoters are looking at 5% – 10% dilution, subject to RBI approval. At current prices, 10% of the bank would be valued at Rs 2373 crore ($320 million) while a 20% dilution would help raise $641 million. The management therefore may negotiate an upfront equity infusion through a preferential allotment that happens at a premium as well as issue warrants at a higher prices, that get subscribed to at a later date.
The plan according to sources is to onboard a maximum of 3-4 reputed investors who have “patient long term money to invest.” The investors are likely to negotiate board seats and other affirmative rights which the bank’s promoter family and management are likely to consider.
The talks are however preliminary in nature. The deal size might also go up if the stock decline continues relentlessly putting more pressure. The transaction is similar to 2107 Bain investment in Axis Bank that saw the Boston based PE major lead a consortium to pump in $1.8 billion in the wake of worsening asset quality and regulatory glare.
One of the officials mentioned above said one option being explored includes several smaller investors rallying behind one or two large PE fund in a possible “book building process” that may eventually see a dilution of around 10-20% of the bank.
IndusInd did not respond to ET’s detailed questionnaire till presstime.
Blackstone, Apax, TPG, Carlyle declined to comment.
Mails to GA, Advent did not generate a response till press time
ET reported on March 17 that the Hinduja family had also asked the Reserve Bank of India that they be allowed to raise their stake in the bank to 26% from the mandated 15%, citing the relaxation granted to Uday Kotak, promoter of Kotak Mahindra Bank recently.
The Hinduja brothers have also clarified that they have made full repayment of the 2016 loan to Citibank releasing 23.8 million pledged shares or 3.43% of current paid-up capital.
FREE FALL
Even though the bank is seeking third party validation from some of the best names in business to soothe investor nerves, experts believe it will be a tough trade. “In such testing time, no investor will give passive capital but would seek downside protection, something that RBI and Sebi does not allow for banks. Additionally, there has also been a change of management in the bank, said a person directly involved on conditions of anonymity as the talks are in private domain. “PE investors may have the fire power with them to write a cheque having raised record levels of capital, globally but will be cautious. They will seek exhaustive diligence to see the real stress on the liabilities side, the loan book, the wholesale bank’s exposure.”
IndusInd shares have fallen over 69% in one month and 77% since the beginning of the year.
The bank’s stock dropped 15% on Tuesday after the lender revealed in an investor call that it has lost 10-11% of its deposits since Yes Bank Ltd crumbled earlier this year. Just two weeks ago, the management had indicated that it had lost only 2% deposits.
Other than state governments that longer think it is safe to keep money in the private sector bank, a rising worry is the bank’s exposure to vulnerable sectors against the backdrop of the lockdown to contain the covid-19 spread. Analysts reckon that IndusInd will find it tough to maintaining its asset quality because of the lockdown.
“The bank has witnessed >10% of its deposits withdrawn since Dec 2019. This, coupled with pressure on its asset quality, will hurt earnings. “As per management’s own admission, loan growth would be flat for a couple of quarters before rising in 2HFY21. We expect FY21/22F loan growth to be subdued at 11%/16%,” said Siddharth Teli, analysts at CGS CIMB. “While valuations are now reasonable following the sharp fall in its share price, we foresee meaningful pressure on earnings given the sharp erosion in its deposits franchise which will hurt NIM. The stock is trading at an attractive valuation of 0.6x its FY21F P/BV.”
Some do feel that the RBI moratorium should help the lender even as the near term asset quality stress is inevitable due to lockdowns, mainly in cards/personal loans, micro finance, real estate/loan against property and vehicle financing business. “The new MD’s strategy to focus on retailization of assets/liabilities should help the bank in the long run,” argues Anand Dama of Emkay Global.
Investment banking sources worry that even for PE funds IndusInd might not be an easy trade. Several of them have are sitting on large mark to market losses on their existing financial services portfolio. Some with listed company exposures have also had to offer extra cash or stock collateral or repay loans taken against listed securities, as margin calls got triggered amidst a equity market meltdown.
