Bandhan's asset management test; IDFC MF's acquisition could be a challenge

The deal will make Bandhan Financial Holdings the latest banking group foray into the Rs 38-trillion domestic mutual fund (MF) industry

For a financial group that started out in the micro-finance business, Bandhan Financial Holdings has taken a great leap with its agreement last week to acquire, together with private equity players GIC and ChrysCapital, IDFC Mutual Fund. The deal will make Bandhan Financial Holdings, which holds a 40 per cent stake in the seven-year-old private bank Bandhan Bank, the latest banking group to foray into the Rs 38-trillion domestic mutual fund (MF) industry.

The deal represents a meeting of mutual interest. Parent IDFC was looking to exit the MF space for quite some time as part of its strategy to divest from non-core businesses. In September 2021, the boards of IDFC and IDFC Financial Holding decided to initiate steps to divest the MF business after they faced shareholders’ ire over the long delay.

With the IDFC buy, Kolkata-headquartered Bandhan group will gain an entry straightway into the top-10 club. Bandhan will get 60 per cent in IDFC MF, while GIC and ChrysCapital will get 20 per cent each. However, though the group sees a big opportunity in this acquisition, the strategy it adopts will decide if it climbs the ranking or falls off the charts.

To be sure, bank-backed MFs dominate the MF industry with over 80 per cent of assets being controlled by the top 10 asset management companies (AMCs), of which seven have banks or banking groups as sponsors (see table 1). IDFC MF, with an asset under management (AUM) of Rs 1.21 trillion, was ranked ninth in terms of average AUM for the March 2022 quarter.

A bank as a sponsor is said to provide muscle for a fund house in the 43-player industry. That’s because a bank’s physical presence can be leveraged for marketing and distribution of schemes by offering a mix of online and in-person interface when it comes to acquiring customers. “The Indian asset management space is gaining traction amongst investors because the funds are performing well. A bank-promoted MF has its advantage in terms of knowing the customer better and their ability to manage customised risk-returns,” said Jaikrishnan G, partner, financial services consulting, Grant Thornton Bharat.

In that sense, Bandhan Financial Holdings is in a good position to leverage Bandhan Bank’s presence in 34 of the 36 states and Union Territories with 5,626 banking outlets serving 25.1 million customers (as on December 31, 2021) to help it attract more customers into the MF fold.

But in recent years, this natural advantage is being eroded with the advent of technology. Since the start of the pandemic, in fact, most new investors have been on-boarded through digital modes, suggesting that merely having a bank as a promoter is no longer a guarantee for success.

But the Bandhan group clearly sees growth embedded in the fact that the MF industry in India is underpenetrated. India’s AUM-to-GDP ratio is at 17 per cent compared to 63 per cent in China and 132 per cent in the US. MF industry assets are projected to grow at an annualised rate of 14 per cent over the next five financial years to Rs 75 trillion. In an interview to Business Standard, Karni S Arha, managing director of Bandhan Financial Holdings, said the consortium would be strongly poised to tap the opportunity. “IDFC has been around for a long time. It is a well-entrenched brand. We like the future of the domestic asset management industry. We wanted some size and scale and good management. It made a very strong case for an acquisition like this,” he said.

But Vidya Bala, founding partner and head, research and product, at PrimeInvestor, contended that “MF is not a business that is raring to grow, it’s now becoming a mature business”.

Bandhan may also struggle because though IDFC MF has a large AUM base, the bulk of the assets are on the debt side where the yields are thin. IDFC MF’s equity assets are less than a fifth (see table 2). Typically, in asset management business, having a large equity portfolio leads to higher profits.

Bala also pointed out that in terms of performance, equity funds of IDFC MFs have been average performers. On the debt side, their schemes might not have given higher returns but have been consistent and extremely prudent in terms of avoiding credit risk.

Then there’s the question of the price Bandhan has paid. Industry observers say the valuation of the deal appears to be fair. It works out to 3.7 per cent of IDFC’s AUM. In December 2021, HSBC MF had acquired L&T MF for around Rs 3,200 crore, or 4.1 per cent of the AUM.

But Bala said a Rs 4,500-crore acquisition for a bank is not a small amount. Also, IDFC’s client base is not large enough for a bank to tap. Secondly, it remains to be seen how Bandhan Bank, which has a rural focus, will make use of the client base which is mostly urban, she said.

Arha, however, said the consortium partners will also bring in a lot of value addition. “They would definitely want it to improve its position and continue to be among the top companies in the industry.” Given the challenging environment, this acquisition may be the Bandhan group’s biggest test yet.