Acquisition value of Fullerton India accretive for Sumitomo: Moody’s

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Sumitomo Mitsui Financial Group (SMFG) investment in Temasek-backed Fullerton India Credit Company (FICC) will improve SMFG’s profitability and diversify its overseas operations. These benefits will accumulate without significantly weakening its balance sheet, according to the rating agency Moody’s.

The agreement to initially acquire 74.9 percent of the shares and ultimately 100 percent of the capital will result in significant goodwill and positive credit for SMFG. The Japanese financial services group has signed a pact with Fullerton Financial Holdings, a subsidiary of Singaporean government company Temasek, to acquire a 74.9% stake for $ 2 billion.

However, goodwill is a result of the high book price ratio of 4.7x at which SMFG makes the investment, exposing SMFG to a high risk of future valuation losses on the investment.

The significant goodwill that the transaction will generate will cause SMFG’s Common Equity Tier 1 ratio to decline by only around 22 basis points in fiscal 2021. The investment is in line with SMFG’s goal of expanding its franchise in Asia.

SMFG aims to achieve synergies by leveraging its knowledge of personal loans, small and medium-sized business (SME) loans and online lending in Japan. It would do this by providing the loan products of FICC to Japanese clients of SMFG in India and by providing financial support to FICC.

SMFG’s international operations represented approximately 40% of its risk-weighted assets as of March 31, 2021. Additional foreign acquisitions will test its ability to manage its growing overseas business alongside its strong franchise national, added Moody’s.

FIIC offers unsecured loans and mortgage loans mainly to SMEs, self-employed and mass market clients and has over 650 branches across India. It had the sixth largest asset under management among non-bank companies in India as of March 31, 2021 and the highest net interest margin of 11.3% as of March 31, 2021.

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