In one of the biggest developments in recent times, Bandhan Bank Limited has finalized its acquisition of Gruh Finance Limited, the fast-growing mortgage lender. This acquisition may take place through a share swap deal which is aimed at lowering the promoter holding of Bandhan Bank and expansion of the bank’s housing finance segment as well. The interesting bit is that Gruh Finance is majorly owned by HDFC (Housing Development Finance Corporation) Limited. HDFC has a stake of 57.83% in Gruh Finance Limited and will get 3 shares of Bandhan Bank for every 5 shares in Gruh Finance as per reports. The swap has been done on the basis of the 6-month weighted average price of the shares held by both companies.
In this deal, HDFC will be cutting its stake by another 5.5% in the merged new entity through the sale of shares to various public institutional investors or also in the secondary market. HDFC will aim at lowering its total promoter holding in the merged banking entity to lower than 10% which is in sync with ownership regulations as laid down by the Reserve Bank of India (RBI). The banking license regulations also make it mandatory for Bandhan Financial Holdings Limited to cut its stake in half to 40% from 82.3% within a period of 3 years from commencement of operations.
RBI has already imposed restrictions on the bank in September 2018 for not meeting these regulations. It has frozen expansion of branches and also the remuneration due to the chief executive and founder Chandra Shekhar Ghosh. The market value of Bandhan Bank is roughly Rs. 63,000 crore at present with Gruh Finance having market cap at Rs. 23,000 crore. The 6-month average prices (volume weighted) for Gruh Finance and Bandhan Bank stand at Rs. 318.50 and Rs. 528.61 on the Bombay Stock Exchange (BSE). The merger will currently lead to HDFC getting a stake of 15.44% in the newly merged entity and the share of Bandhan Financial will come down to 60.27%. It will have to keep taking more initiatives to lower its overall ownership in the bank.
As part of this deal, HDFC will also come up as a promoter for Bandhan Bank which is one of the significant outcomes indeed. Now, it already holds 19.72% in HDFC Bank as of the 30th of September, 2018 and the RBI does not offer permission for the promoter of a bank to own in excess of 10% in another bank in the capacity of the promoter. As a result, HDFC is holding talks, as mentioned earlier, to sell off 5.5% in the newly merged entity.
Is the deal worth it?
Gruh Finance has performed reasonably well in the Indian market till now. For the September quarter last year, the company had loan disbursals touching an impressive Rs. 2,738 crore. The loan book also touched Rs. 16,663 crore by the end of this quarter. The company also posted Rs. 220 crore in net profits for the first half of the present financial year. The merger share swap ratio in the deal is 2.84:5 and dilution in Bandhan Bank Limited’s equity will be lower by 1.5% in comparison to a situation where the share swap ratio was fixed at 3:5.
Bandhan Bank is going all out to lower the stake held by its promoters in sync with RBI guidelines. Gruh Finance has been given a valuation which is a whopping 13.6 times of its overall net worth and the price-book valuation for Bandhan Bank has been kept at 6.45 times. Gruh Finance’s high valuation may be attributed to its parent HDFC which owns 57.8%. HDFC will sell its stake at a high valuation and the monetization may take place sometime later. HDFC can thus freely venture into the low-income finance category without bothering about conflicts with its subsidiary entity. 18% of lending by HDFC has reportedly been for the low-income group in H1 2018 and also for the EWS (economically weaker sections) where loan values have ranged between Rs. 8-10 lakh.
Bandhan Bank is also looking at scaling up its micro-loan portfolio and the merged entity will be able to venture into both affordable housing loan and micro-loan categories. Gruh Finance has decent performance overall with a 20% increase in profit and 18% disbursement growth for the September quarter. It also has the lowest chunk of developer loans which is a major thorn in the flesh for other housing finance entities. The stocks of the company have been rising steadily as well. In case the decision enables Bandhan Bank to get some relief from RBI regulations by lowering its promoter ownership stake, it may be able to open new branches once again.
Does Bandhan Bank really benefit?
This deal gives Bandhan Bank the resources it needs to build its affordable loan book, while helping it lower overall promoter stake. These are two of the key reasons why this deal makes sense for Bandhan Bank. The acquisition of Gruh Finance will help slash promoter stake to 61% from 82% and Bandhan Bank may actually be taking a long-term view of the proceedings. This may have contributed towards the high valuation given to Gruh Finance.
Firstly, a readymade and existing affordable housing loan portfolio is there for Bandhan Bank to cash in on and the quality of the same is ensured through the association with HDFC which is the segment leader for housing finance. After the merger, 28% of the loan book at Bandhan Bank will be taken up by retail home loans and this was almost non-existent before the merger. Bandhan Bank is looking to tap affordable housing loans as the next big growth avenue and has been shying away from corporate lending till now.
The high NPA levels of PSBs has made Bandhan Bank wary of foraying into this category. Affordable housing loans are a good way to start its journey towards being a bigger financial entity. 87% of lending at Bandhan Bank is focused on small-ticket size micro-finance loans. The share of this segment will come down to 58% post the merger. This deal helps Bandhan Bank to opt for higher-ticket lending for productively tapping its deposits. Bandhan currently has a deposit base of Rs. 34,600 crore as of September 2018. Its loan book of roughly Rs. 35,600 crore is funded by its own deposits. Bandhan Bank will also profit from accessing Gruh Finance Limited’s proprietary technologies and operating processes along with its own customer insights to build a sizable affordable housing loan book.