UK deal to impact only 1% of total balance sheet:Indiabulls

The company has a target of taking the US business to USD 1.5 billion of deposits in about 24 months. The board decided that there was a need to take concrete steps to establish our credentials to be able to move on and become a deposit taking franchise, says Banga. Below is the verbatim transcript of Gagan Banga’s interview with Ekta Batra & Reema Tendulkar on CNBC-TV18. Reema: Could you tell us how this valuation of USD 100 million was arrived at because there are few on the street who believed that valuing at 2 times price to book is a bit expensive considering that OakNorth Bank is relatively new after getting the licence? A: To just step back and to run you quickly through the process of first of all reaching at a conclusion that this transaction is something which is going to add value to the company. Indiabull Housing Finance balance sheet today stands at almost Rs 70,000 crore. Over the course of the last six years has been compounding at an average rate of 25 percent every year. My sense is that we should be crossing about Rs 1,00,000 crore of balance sheet by 2017 and 2018 which is in line with the growth trajectory that we have put in place for our shareholders and also the guidance that we have given. Now given that we had as part of our board had set up a committee under the Chairmanship of Dr KC Chakrabarty the Former Deputy Governor of the Reserve Bank of India (RBI) to figure out how we should be efficiently financing ourselves. Deposit taking franchise is what was arrived at as the missing piece as far as our entire liability franchise is concerned. The board decided that we have to take concrete steps to establish our credentials to be able to move on and to become a deposit taking franchise. The unprecedented approvals for an Indian corporate to invest in a foreign bank given by four different regulatory agencies two in India and two overseas is a reflection of the discussion and the thought process behind this entire transaction. Now coming specifically to the transaction, OakNorth Bank is a bank which got licensed earlier this year. It has been valued at about 1.9 times book. It had to be valued at something greater than book because it already was in receipt of a licenece, had put together management team. It had also started accepting deposits and had an extremely credible and illustrious board led by Lord Adair Turner who is the former Chairman Financial services authority of the UK. One of the moving numbers as far as these valuations are concerned is where is the eventual IPO type of pricing which is going to happen because this in effect becomes private equity transaction . So, if we look at banks which have a similar characte that have been recently liceneced and have been able to reach IPO in three years or so, three to four years of operations they are all trading at north of three times. So, there was a little premium paid for a licence and to be able to get a controlling stake so the letter that we have received from the Bank of England as far as this particular investment is concerned talks of controlling stake. Without a controlling stake this transaction would have made absolutely no sense because it would have had no credibility whatsoever to Indiabull Housing. So, it is our step to kind of build back credibility. The financial impact of this USD 100 million on a balance sheet of Rs 70,000 crore is that it is about 1 percent of my balance sheet. Supposed loss in urban power is to the tune of some Rs 18 to 20 crore, in the context of the fact that the company last year reported Rs 1,900 crore and of profit after taxes (PAT) and this in the first half has already reported at Rs 1,066 crores of profit after taxes it is like less than week of profit. So, it is a very small investment for a tremendous strategic upside. While some shareholders may not have appreciated the deal today I am sure that as management engages with shareholders and explain the tremendous benefits that can accrue to the company over the next one and a half to two years. Everybody will be appreciative and supportive of this transaction. Ekta: One of the concerns which has been raised by the analyst community is with regards to how the deal is going to be funded. You just raised money via qualified institutional placement (QIP). Is any of that money going into funding this deal? A: We did the QIP in September, 2015. As of March 31, 2015, the company had a balance sheet of around Rs 60,000 crore. So, at that given balance sheet size of March 31, 2015 this was just over 1.1 percent of our balance sheet as on that day. At that time, the company also had a net worth of approximately Rs 7,000 crore. So, this was about 9 percent of our net worth as of March 31, 2015. More importantly, from a financial services operation, we were already sitting at a capital adequacy ratio of approximately 20 percent, as against a regulatory requirement of 12 percent and we were geared only about 6.3 times as against our own guided cap guidance on gearing cap of seven times. So, we had all the animation even before the QIP as far as doing this transaction is concerned. And having said that, our shareholders' views have to be really respected. And I am going to be explaining to each one of them as to the benefits of this transaction which we will accrue. Ekta: The other point being that the deposit taking would then just be a strategic initiative for you to possibly show your strength in terms of deposit taking and hence strengthen your case in India, there would not be any direct correlation from you getting a license directly in India, am I correct in that analysis? A: There is no second thought of the fact that the company\\'s core business is of mortgage lending. The company is not going to be diverting its management resources or additional financial resources into running of this bank or doing anything overseas. The company as it continues to grow its balance sheet at about 20-25 percent is aware of the fact that it needs to, from time-to-time, take very substantial qualitative steps to ensure that this growth that we have started over the last many years continues for the next many years. The compounded annual growth rate (CAGR) numbers that we have persisted with also continue. This is part of three very important qualitative steps that we had to take which we had started taking and which are so to say the building blocks of growth that we will take us pass 2020. Though three qualitative tests are done, one was to get our loans against property portfolio independently rated on a loan-by-loan basis by a variety of rating agencies, that part is done. The other was to raise capital which would become growth capital for business to be conducted over the next five-six years and we are now capitalised enough to go on till 2021. The third was this which will in due course of time have a credibility run of rub off and will allow us to establish a deposit franchise. This is also done so I will go on record to say that 100 percent of the capital that we have in this company would be retained only in the mortgage business. There is nothing else that is on the radar and as far as this investment is concerned, as I said, the diversification and strengthening of the liability profile and the liability franchise of the company is something which is often and continuously discussed with shareholders. I have had several discussions with them about the fact that the real franchise, which Indiabulls Housing represents today is the liability franchise we are creating. Yes, unless there is a regulatory approval of some sort, we are not the type of management, which will be conjecturing about what may happen if we receive an approval, there is no certainty about a transaction till the time regulatory approvals are not rejected. Ekta: One another point which raised eyebrows and I am just quoting what I have heard in terms of feedback was basically how this deal was arrived. For example the past relationship we do understand that the promoter of this particular bank is basically a part of LN Mittal group, which was one of the early investors in the Indiabulls Group. Hence maybe that might just have been too close for comfort or maybe a lack of objectivity kind of investment. Your comments on the same considering that the promoters also invest 10 percent in this? A: Rishi Khosla who is Co-founder and CEO of OakNorth Bank in the year 2000 was part of this LN Mittal family office and in 2000 had given us USD 1 million in a co-investment deal with another venture fund which went by the name of Transatlantic Corporation. He left LN Mittal's office in 2002, and then set up Copal Partners which he sold eventually for USD 700 million to Moody's and after that he has set up his bank. So he has been independent finance professional who has built up a very credible business. So that is his core strength and not something that he was part of an investment team of a family office where the principal was calling the shots 15 years ago. So it is very unfortunate when such a discussion is going to take place. The second point on our Chairman and Founder Sameer Gehlaut putting in 10 percent that is for two reasons, one is that we want to have a maximum credibility run of and for which we wanted to maximise the stake as far as this bank is concerned. There was a regulatory cap of USD 100 million of investment that we could have made which restricted the stake at 40 percent. So Sameer has decided to put in his personal money at exactly the same valuation that the company is putting in. So that does two things, one it has a credibility rub off on the management team of Indiabulls Housing and it also establishes a sort of a benchmark given the fact that this bank is unlisted and there could be some discussion around what is the appropriate valuation. _PAGEBREAK_

Ekta: Would you be exiting a part or may be your entire stake via an IPO, like you mentioned that could be something on the cards eventually? A: I would go on to say that fundamental focus of Indiabull Housing remains solely on tapping into the mortgage opportunity in India. We believe that the Indian mortgage opportunity at 20 percent growth opportunity for the next 20 years. So we are fully focused on that. We are doing this for a very specific and strategic purpose which is to establish credibility on our deposit franchise. As and when that gets established, which I am very hopeful which should not take very long and as and when we get a deposit taking license, what to do with this investment is a subject matter of decision to be taken then. The first focus is to make sure that through our oversight this banks conducts its operation extremely properly and we are allowed to get deposit taking franchise, which I am hopeful should take 18-24 months. Ekta: Any more strategic investments that we can expect and funding incremental funding needs? A: There is no funding requirement on equity this is for the company till at least 2021. So, for the next six years we are capitalised fully. Even after six years our capital adequacy ratio will be in the range of 19-20 percent. We had already guided that in about seven times of gearing there is no requirement for the company to raise any capital so that is completely off the table As far as any other strategic investment is concerned, I mentioned that there were three key building blocks that we needed to invest in; through the course of the year we have already done that. All qualitative steps out of normal course of business that we needed to do are behind us. There is going to be not of single rupee of investment like in the last six years. We have not allowed Rs 1 of the business to move out of the mortgage business. Over the next six years there will be not Rs 1 of money which will be moving out of this core business. I am reasonably sure that even this investment of Rs 660 crore, which we have made the financial upside that will start accruing to us in the next six months itself because of the upgrades in our credit ratings and the resultant reduction in cost of funds will more than offset with the minor impact that it has of Rs 18 crore odd on our earnings. So, that is how small the number is and even that small number has been calculated and thought through. Reema: Could you tell us how you foresee OakNorth’s balance sheet to be? Currently we understand the loan book is 25-30 million pounds and deposit base is 10-15 million pounds. Going forward by the end of the year, by the end of the 18 months what could be the potential size? A: The way that the regulatory commissions work in England is that you have to submit business plans around which your capital adequacy for that period is set. The business plan right now is to be taking this business up to USD 1.5 billion of deposits in the next 18-24 months. They would always have deposits to the extent of an additional 20 percent on assets so assets will be to the tune of about 1.2 billion. They are also well capitalised for the next I would say three to four years and to be able to get to a balance sheet size of approximately USD 2 billion through the equity which already has been put in and through some additional tier two bonds that they will raise. So for the next three years plus they do not have any capital requirement and their sole focus will be to raise deposits and then to deploy it in the small and medium enterprises (SME) market where they would be synergies and terms of our credit appraisal practices helping them build up a fine asset book.