Stock drops 8% as the board of AU Small Finance Bank accepts the merger with Fincare SFB

 Stock drops 8% as the board of AU Small Finance Bank accepts the merger with Fincare SFB

Monday's intraday trading saw AU Small Finance Bank shares drop by more than 8% after the lender's announcement that the merger with Fincare Small Finance Bank has been authorized by the board.

The company is going to purchase Fincare Small Finance Bank for ₹4,411 crore in an all-stock deal. The bank said that the action is intended to increase its presence in southern India and break into the microfinance industry.

The stock dropped to ₹630.90, the day's low, by as much as 8.5 percent. In the previous six months, this is the lowest level. The stock is now more than 20 percent below its May 29, 2023, record high of ₹794.95.

The stock lost almost 4% of its value year-to-date in 2023, after having gained nearly 21% in the previous year. As opposed to this, the Nifty bank index has increased by around 5% over the last year and is now flat but down on the year.

For every 2,000 fully paid-up equity shares that Fincare Small Finance Bank shareholders held, they will get 579 equity shares of AU Small Finance Bank Ltd. following the terms of the merger plan.

Following the merger, AU SFB will own around 9.9 percent of the shares held by the current Fincare SFB shareholders.

"The plan is contingent upon the endorsement of the Reserve Bank of India (RBI), the Competition Commission of India (CCI), along with which companies shareholders of the transferor company (Fincare Small Financial management Bank Ltd) and transferee company (AU Small Finance Bank Ltd), as well as a ₹700 crore capital infusion by the Fincare SFB promoters," AU SFB stated in a regulatory filing late on Sunday night.

It also said that the scheme's designated date would be February 1, 2024, or a date that might be decided upon jointly by the two firms and authorized by the RBI.

Additionally, AU SFB has affirmed that after the merger, all Fincare SFB staff members would become part of the AU SFB family.

It further said that after the merger, the Managing Director and CEO of Fincare SFB would take on the role of Deputy CEO of AU SFB. To further bolster the leadership group, Divya Sehgal, a current director on the board of Fincare SFB, will join the board of AU SFB.

The management went on to say that the merger's primary strategic justifications were the complementary branch network that would create a pan-India Small Finance Bank, portfolio diversification through access to rural and financial inclusion-focused microfinance businesses, shared values, a single regulatory framework, an experienced team with deep domain expertise, and compelling potential for long-term synergy, particularly in deposit, technology, and scale-driven efficiencies.

The establishment of these two banks followed an RBI directive from 2014. Disha Microfin, which merged with Future Financial Services to become Fincare SFB, began operations in July 2017, whilst AU Small Finance Bank opened for business in April 2017.

Fincare has over 54 lakh clients overall and provides them with a wide variety of deposit and asset options. With 14,867 workers, it is well-represented in South India. The bank has ₹9.453 crore in total deposits and ₹10.541 crore in gross advances. It now has 1,292 banking branches in 23 states and Union territories, and after the merger is complete, it should have 2,334 branches overall.

By the end of September 2023, the combined company is anticipated to employ about 43,000 people, service around 98 lakh clients, and have a combined balance sheet value of more than ₹1,1 lakh crores, according to the exchange filing.

In contrast, Fincare Small Finance Bank had aggregate assets of ₹14,777 crore and a net value of ₹1,539 crore as of the September quarter, while AU Small Finance Bank recorded total assets of ₹95,977 crore as well as a net worth of ₹11,763 crore.

AU Small Finance Bank recorded a net profit of ₹401.8 crore for the September quarter, a 17.3% increase over the ₹343 crore recorded for the same time last year. In the September 2023 quarter, its net interest income (NII) was ₹1,249 crore, 15.3 percent more than the ₹1,083.4 crore recorded in the same time of the previous fiscal year.

AU Small Finance Bank's gross non-performing asset (NPA) ratio decreased from 1.91 percent in Q2FY24 to 1.76 percent in Q2FY24.

However, compared to the June 2023 quarter's 0.55 percent, the net NPA ratio rose to 0.60 percent in the second quarter.

"We saw robust and steady growth in deposits, digital, and advances during the second quarter of FY24. The optimistic prognosis for AU markets, where there are bright opportunities for expansion and market penetration, further enhances this resilience. Even in the present context of rising prices and fierce competition, our major strategic emphasis is on developing low-cost retail deposits," AU Small Finance Bank MD & CEO Sanjay Agarwal said.