AU Small Finance Bank and Fincare Small Finance Bank Merger: A Strategic Move for Growth and Profitability

In a significant development in the banking sector, AU Small Finance Bank had announced its merger with Fincare Small Finance Bank in October last year, and had received approval from the Reserve Bank of India earlier this month. This strategic merger, effective from April 1, signifies a pivotal step towards achieving sustainable growth, enhancing profitability, and bolstering stronger return ratios for AU Small Finance Bank.

The merger agreement stipulates that Fincare Small Finance Bank shareholders will receive 579 equity shares of AU Small Finance Bank for every 2,000 shares they own, marking a new chapter in the banks' journey.

What do the Analysts say?

Analysts have lauded the merger, highlighting its potential to propel AU Bank into new territories of growth while meeting Priority Sector Lending (PSL) targets and generating long-term PSLC income. Brokerages have varied stances, with recommendations ranging from 'Buy' to 'Reduce,' reflecting the merger's multifaceted impacts on market positioning and financial health.

The merger between AU Small Finance Bank and Fincare Small Finance Bank is set to mark a significant shift in the landscape of small finance banking in India, creating a diversified portfolio with an enhanced focus on inclusion-focused microfinance, mortgages, and gold loan businesses. This strategic consolidation is poised to foster a pan-India presence for the combined entity, extending its reach across 25 states and union territories with more than 43,000 employees and 2,334 touchpoints. The merger, valued at approximately $530 million, is not just a financial transaction but a melding of shared values and visions aimed at bolstering financial inclusion, particularly for micro entrepreneurs and small enterprises.

Where does the future stand?

The merger brings together AU Small Finance Bank's broad customer base and extensive network with Fincare Small Finance Bank's strength in the microfinance sector. Fincare's journey from a predominantly microfinance-focused entity towards a more balanced secured and unsecured lending portfolio highlights the strategic intent to mitigate the risks associated with over-dependence on the microfinance sector. The merger is expected to enhance the loan book of AU Small Finance Bank by approximately Rs 10,541 crore, diversifying its offerings to include a mix of microloans, business loans, housing loans, gold loans, and other loan products. This move is anticipated to pivot AU Small Finance Bank’s exposures significantly in microfinance lending, expanding its portfolio and assuming a greater role in supporting the unorganized sector, which plays a critical role in India's GDP growth and employment opportunities.

Despite the strategic advantages, the merger announcement initially led to a nearly 9% drop in AU Small Finance Bank's shares, reflecting market concerns about the increased focus on unsecured lending. However, the merger is viewed by many as a positive step towards achieving a diversified portfolio and better reach, with the combined entity boasting over 98 lakh customers and a substantial pro forma gross advance of Rs 75,570 crore.

The strategic objectives set forth by AU Small Finance Bank for 2027 aim to capitalize on this merger, focusing on growth in both liability and asset base, increasing the mix of high-yield, high Return on Assets (ROA) portfolio, and maintaining credit costs within specific ranges. This merger represents a significant step towards realizing these objectives, promising a future of growth, profitability, and an expanded capability to serve a broader spectrum of customers across India.

As the banking landscape evolves, the AU Small Finance Bank and Fincare Small Finance Bank merger presents an intriguing case study on strategic consolidation in the financial sector, aiming for a fortified position in a competitive market.

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