Fairfax Financial Holdings Limited (IDBI) Earnings Call Transcript & Summary

Good morning, and welcome to Fairfax's conference call to discuss the proposed IDBI Bank transaction. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Your host for today's call is Prem Watsa with opening remarks from Derek Bulas. Derek, please begin.

Good morning, and welcome to our call to discuss Fairfax's proposed IDBI Bank transaction. This call may include forward-looking statements. Actual results may differ perhaps materially from those contained in such forward-looking statements as a result of a variety of uncertainties and Risk Factors, the most foreseeable of which are set out under risk factors in our base shelf prospectus, which has been filed with Canadian securities regulators and is available on SEDAR+. Fairfax disclaims any intention or obligation to update or revise any forward-looking statements, except as required by applicable securities law. I'll now turn the call over to our Chairman and CEO, Prem Watsa.

Thank you, Derek. Good morning, ladies and gentlemen. Welcome to our conference call on IDBI Bank. With me today is Peter Clarke, President of Fairfax Financial Holdings, Amy Sherk, Chief Financial Officer; and Sumit Maheshwari, who's the President of Fairfax Capital -- Fairbridge Capital, our subsidiary in India. As we have said in our press release, we thank Prime Minister Narendra Modi and his team for undertaking a highly transparent and competitive process before selecting us as the buyer of approximately 61% of IDBI Bank. We believe, as I said in the press release, this is a once-in-a-lifetime opportunity to purchase a majority interest in a bank in one of the world's fastest-growing economies and to combine it with a successful and growing insurance company and an established provider of investment banking and wealth management services. We intend to support India's journey towards Viksit Bharat and a USD 30-plus trillion economy, and our ambition is to play a critical role in the Prime Minister's vision of India as a developed economy by 2047. We believe a successful IDBI Bank can transform the lives of average Indian citizens. And our vision is to help increase India's credit to GDP ratio. We have been working on this transaction for 4 years now since October 2022. And but we have been tracking the bank since 2019, allowing us to do some very detailed due diligence. IDBI is the sixth largest private bank in India in terms of deposits and was founded in 1964, 62 years ago. It got into trouble in the 2016 to 2020 time period, with cumulative losses of approximately USD 6.4 billion financed by LIC and the Government of India, Rakesh Sharma joined the bank in 2018 and cleaned up the bank by taking losses of approximately 1.8x the shareholders' equity in 2015. Since 2021, the bank has been profitable. And in the last 12 months ended June 2026, earned approximately $1 billion and INR 93.2 billion. Rakesh has done a superb job and will continue as CEO. We will add to the bank's Board N.S. Kannan, who is the former Managing Director and CEO of ICICI Prudential Life and former Executive Director and CFO of ICICI Bank. He will be Chairman of IDBI Bank, subject to RBI approval. Rajendran, who's the former CEO of CSB Bank, will also work with us closely as an adviser. Also, we benefit greatly from having Deepak Parekh, former Chairman of HDFC Limited and the founder of HDFC. And Paresh Sukthankar former Deputy Managing Director of HDFC Bank as our advisers. The IDBI Bank is financially very strong with capital adequacy of 27% and a net worth of $7.5 billion. We will always maintain a very strong financial position as we have throughout our 40-year history. The bank also has a huge deposit franchise with 43.6% in CASA deposits and CASA deposits are low-cost deposits. Also, IDBI Bank has a net NPA, net nonperforming asset ratio of only 0.2%. Nonperforming loan provisions of 99% of nonperforming loans, loan-to-deposit ratio of 80% and total assets to common equity of only 7x, all very good in an absolute way and also compared to the private banks in India. If you analyze Singapore's growth and ask yourselves, if you knew Lee Kuan Yew, would become Prime Minister in 1965 and grow the economy like we did for the next 3 decades, what would have been the best investment? Of course, the best investment was real estate, but that is tough to buy for any institution. The next best investment was banking. The 4 largest banks in that country compounded at about 20% annually. When I was on the ICICI Bank board for 8 years, the CEO at the time, Mr. K.V. Kamath, I told us bank assets in India would grow annually at 2 and 2.5x the growth in nominal GDP in India, and that is exactly what happened. We see this as an opportunity for the next 2 decades at least. Combining IDBI Bank, Digit and IIFL Capital would create an entity that would transform the lives of average Indian citizens provided meaningful and significant benefit to Indian consumers and businesses and will also benefit IDBI Bank, Digit and IIFL Capital and Fairfax for many decades to come. And as you know, we always treat people using the golden rule, treat people like you want to be treated yourself. Fairfax expects the purchase price for the transaction, the purchase of approximately 61% of IDBI Bank to be financed by cash on hand dividends from our insurance companies, potential asset sales, including the previously announced sale of Eurolife Company and the contributions of Digit and IIFL Capital at their respective market prices. As we said in our press release, all the transactions will be subject to RBI approval, SEBI and IRDA, which we expect to get in time. Thank you for joining us, and now we're ready to answer your questions. Fran, over to you.

[Operator Instructions] And our first question today is from Stephen Boland with Raymond James.

I guess the question just goes on the -- maybe one of the last statements you said, and I apologize, this is one question. But your debt-to-capital at the end of Q2 was 27% between Boots and IDBI, it's almost an $8 billion outlay, you mentioned cash on hand. That's about $2.3 billion at the end of Q2. You've got a couple of billion of credit facility. So I guess what is your maximum debt to capital goal at the end of this outlay because then we can back into a certain amount of...

Very good question. That's a really good question. And I'll pass it on to Peter, how do we finance this? That's a great question. And you can imagine, we've thought about this for at least 4 years. And Peter, over to you.

Thanks, Prem. We expect the funding of the acquisition is $5.6 billion, as Prem did mentioned. And the expectation is we're going to do it through a combination of our holding company cash, dividends from our subsidiaries, asset sales and the contribution of Digit Insurance, including the Life operations and IIFL Capital. For those 3 companies that's approximately $3 billion on its own. I should just point out, at June 30, Fairfax held at the holding company, cash and marketable securities of $2.3 billion, plus on top of that, an additional $2.3 billion of investments in associates and consolidated noninsurance companies, so almost $4.6 billion of cash and securities at the holding company. Also just to reinforce that in the first half of the year, we sold half of our position in Poseidon for approximately $1.9 billion and the sale of Eurolife that was announced last year, we expect to close in the second half of 2026 for approximately $900 million. One other point is at June 30, the market value of our associates and noninsurance consolidated investments was in excess of their carrying value of $4.4 billion, so that $4.4 billion is not carried on our balance sheet today. And then lastly, Fairfax, we've averaged $4.3 billion of earnings over the last 3 years. with strong earnings and premium levels moderating for our insurance operations, we are generating a lot of excess capital, and that can support further dividends from them. So when you go through all those points, you can see that we have a great amount of flexibility for financing this acquisition and the other transactions that you mentioned. And just to point out on our financial leverage, none of this financing includes any long-term debt issuance. So our leverage ratios will not be affected significantly from this.

Jaeme Gloyn with National Bank Capital Market.

Congrats on what seemingly to get this over the line. I guess one follow-up on the funding. Is the plan to use any of the insurance company float as part of that funding structure? A quick answer there. And then secondly, just in terms of the strategic benefits that will flow through from this deal. What -- I guess, what are some of the first steps that you expect to achieve to implement? And how can we assess this deal over the near term given that it's a multi-decade investment thesis.

Yes. So the strategic benefits from IDBI Bank, it's an investment from our standpoint. We've invested in India for like 30 years plus, we've done extremely well, as you know there. And this country is perhaps the best country to invest. What people forget is India, by the end of this year and Piyush Goyal the Commerce Minister mentioned this in Toronto, there's going to be $60 trillion to $70 trillion free trade agreements free trade agreements with Europe, with U.K. with Japan and on and on and on. Canada is almost done also. So what does that mean? That means you can manufacture in India at a very low cost and sell it all over the world. They're talking free trade into Brazil, they're talking free trade into Australia, New Zealand, all of those countries. On the other hand, companies can also sell into India. So our thinking is that in the next 10 years, India is going to have unbelievable growth because of that opening up the economy. On top of that, the Prime Minister said that this is a classic here, we are buying one of the -- this is, I think, the -- perhaps the biggest financial transaction in India and perhaps not the last one. And so India is on a tremendous growth opportunity. I've used this before, but just think of it. It's a very simple example. It's actually my son, Ben, has used it many times, Maharashtra is one of the big states in India, 130 million people. And Norway has 6 million people, 6 million people, 130 million people, same GDP, gross domestic product, GDP. And that just shows you the potential in Maharashtra, by the way, if you go to Bombay recently, and I was there for about 10 days. I mean it's a unbelievable change that's taken place in the last couple of years. And so the opportunity in India for economic growth, there's IPOs every day and our IIFL Capital benefits from that. And -- but in terms of funding in the insurance company, Peter, why don't you tackle that one.

Yes. And specifically, Jaeme, just on your question on how much will be in the insurance companies' portfolios. And it's still early days, but we expect that to be minimal. A lot of this will be funded at the holding company level.

Tom MacKinnon with BMO Capital.

If I look at your AGM, you have this operating income outlook, $5 billion and just $1 billion of that $5 billion was from share of profit in associates and consolidated noninsurance income, now with Boots and IDBI, how are you looking at this operating income outlook now?

Yes. No. I mean, Tom, like I just told you that the last 12 months, this company, IDBI Bank made $1 billion. We own 61%, math, it's pretty simple. This is after tax net income. And I'm sure, over time, they'll increase the dividend. They're very well capitalized. And so that flows to us. But the big opportunity, Tom, is the growth in emerging market. When an emerging market goes from $3 trillion to $4 trillion GDP to $31 trillion in 20 years, you just think of what happens at the middle class, which is however you define it, $250 million, $300 million and the -- that's like the United States population. And it doubles in 10 years. Imagine the bank accounts, the insurance that's needed, the housing that's needed. I mean it's just unbelievable, every product that you can think of. And by the way, China went through that in the 2000 to 2010 time period. when they were growing at more than 10% real economic growth. And we sort of see that happening in Indian right now and diffusing because of all the roads that are being built, like it was built in the '50s in the United States, diffusing into the rural areas. So there's some massive opportunity. And of course, with Galen Weston and Wittington and Boots, and we see that they have a tremendous expertise in that area, and we'll write a little about that in the annual report. But as you said, the operating income for us from these significant investments is going to be very meaningful for Fairfax shareholders. Peter, you want to just say about how we are going to -- how that is accounted for in terms of being an associate? IDBI Bank.

Sure. Yes. No. And like Prem said, yes, we expect that the -- will be accounted for on an equity accounted basis again. Just under banking regulation -- the Banking Regulation Act in India, one shareholder can only have voting rights that are capped at 26%. So this fact and a few others, that's really puts -- we think that puts this investment in the equity accounting bucket. And I guess the Boots would it be a similar position. And you might remember, we did sell half our position in Poseidon in the first half of the year, and that was also in the same equity accounting bucket.

Any follow-up, Tom?

Yes. How do you feel about the shift in your earnings mix now away from insurance, like underwriting profit interest and dividend income and more into earnings from associates, if you will. So [indiscernible] always.

Yes. Sorry, I was just going to say, I think you said, is there a shift in earnings mix from, say, insurance...

And how do you feel about that? It's traditionally not what Fairfax was about. It was an insurance company investing in the float. Now adjustment in...

The insurance business, Tom, is a basic bread and butter. That's where we make a good return. We've got underwriting profit, which we told you in the operating income, I think we said the operating income of $5 billion and after taxes and all about $150 per share. and $4.3 billion as Peter was saying in the past. But that operating income, that's 2 components for it. There's about $2.5 billion of interest and dividend income. Mainly from government bonds, pretty significantly government bonds. We don't have any private credit. We don't have any -- unfortunately, we don't have any high tech -- we don't have anything with PEs to speak of. So it's very, very conservative, recognizing that the markets are high. But having found something like this, we react but our investment portfolios are very conservative. And it's not long term, 3- or 4-year term for our bond portfolio. Interest rates have gone up and then they have come down in the last few days. But it doesn't affect our bond portfolio too much and it's all unrealized fluctuations. But our bread and butter is underwriting profit and investments. The insurance business has interest and dividend income. Insurance business has developed a USD 75 billion investment portfolio. There's no business like the insurance business, if you can manage it properly. That's allowed us to compound close to 20% over 40 years. Yes. Peter, do you want to add to that?

Just one thing, Tom, I'll add is you'll remember though, like our insurance business, we've doubled our premium since 2019, we went from about $16 billion to over $33 billion today. So I don't think there's any less focus on the insurance business, but our portfolio doubled, our premium doubled and we invest where we think there's the best opportunities.

And our insurance business is very disciplined, Tom, as you know, very underwriting focused, very conscious of reserving it's all extremely well reserved. And the market is coming down right now. So we're meaning the insurance market is coming down. And so we -- as Peter said, we don't think our insurance businesses need any money, but we are very, very excited about our insurance business. We're one of the top 15 companies in the world, Tom. All over the world. And if you had told me 4 years ago when we said with $10 million that this would happen, we would never believe it. And we've got a -- we went through the ups and downs, but we've got a very strong insurance business as good as any in the world.

Thank you, Bart Dziarski with RBC Capital Markets.

I wanted to ask around sort of the expected returns on this acquisition in the sense that you have a successful track record with bank deals, notably Eurobank, but it was different where you purchased Eurobank during a period of distress and you got a really attractive valuation here. You're paying a premium to book and Prem, you mentioned the bank is on solid footing. So should we expect that 15% return you've generated on other bank investments? And if so, what are the sort of drivers of that return?

So thank you for that question, Bart. I'll just give you a sense for what we did with CSB Bank, which we bought in 2018. The book value has grown since that time to now about 24% a year. Net advances loans have grown by 20% a year, and the deposits have grown by approximately 15%, and it's profitable, has done extremely well. And so bank investments, light from ICICI bank, many, many, many years ago to Bank of Ireland and CIB Bank in Egypt. It's one of the best banks in the world that happened to be in Egypt, and Eurobank. Eurobank, I think we said in the annual report, pays a dividend and then the dividend and the buyback accounts for half the earnings, and we own 1/3 of it. So every time they buy back, we have to sell the force to sell we can't have more than 1/3, Otherwise, we're going to make an offer to all shareholders. And the net effect of that on a cost basis is not accounting, but on a cost basis, our investment is getting to be 0, meaning very soon, we would have no cost in it because we've got the shares that were bought, we have to sell and the dividend that was paid. And it's like it's a phenomenal investment for us. And it continues to do very well. Greece continues to do very well. So they -- as you said, they were depressed in the past. And we got more than -- we got 15% on it. This one, the big thing I'm trying to mention to you so that you -- and you can see is the growth possibility. Nothing is guaranteed in life but the growth possibility in India we think, could shock everybody. And remember, this bank used to be a government bank, it become a private bank now, but it's really very recently. And we can attract -- and we have attracted. We just have to see what we did with the Bangalore International Airport. We can attract the best people in India to join us. A high level of integrity, run the bank focused on customers doing well for the customers, focus on providing great service for the customers, focus on the employees who provide the service, make a return, you have to be profitable, the bank as they have said in their investor presentation, they want to make 15% and have done that recently. And then look after we, of course, invest in the community. Fairfax with the whole company was about $10 million. Last year, we paid USD 90 million. all over the world in our charitable 2% of pretax profit. So we're going to use that same model and it's decentralized run by Rakesh Sharma. He's done a fantastic job going to help get some help from Rajendran and Kannan, in a bank, it's credit, credit, credit, you have to be careful about credit, who you're lending to, they got into trouble in the past because they lend 70% to commercial accounts. Today, it's 30% commercial accounts meaning businesses, 70% retail and out of that 70% retail, 70% mortgages. So it's a very, very strong company right now, as I told you, assets to equity is 7x in 2008 when we had all the problems in North America, the assets to equity were through 20x, 25x, it's very likely levered, and we'll always maintain a very strong financial position. I'm not going to expand at the expense of the financial position.

Jeff Fenwick with ATB Cormark.

So Prem, I wanted to ask about the ownership percentage here on the deal and in the context of the regulatory limits within India, it sounds like Digit and IIFL will be vended in. You'll take cash maybe out of the surplus capital. So you'll be at 61%. I think the limit today is 74% under the regs? And -- but then I'll recall there's typically some requirement to sell down to a certain level over a period of time. So perhaps you could just remind us of what that structure is.

Yes, that's true, Jeff. As Peter said, it's 26%, right? So they've given us 15 years in 10 years, we have to go from 60% to 40%. And in the last 5 years out of that 15-year time period, we go down to 26%. That's what the rules are today. And of course, we'll follow the rules. But I'd remind you that when we began in the insurance business, you were limited to 26% property casualty insurance foreign company was limited to 26%, then it went to 49%, then it went to 74%. And today, Jeff, it's 100%. You can own 100% of a property casualty company. So these rules may change, we don't know. But if the rules remain the same, we'll have to go down to 40% at the end of 10 years and 26% at the end of the 15 years.