Bandhan Bank, on Monday evening, announced that it will buy Gruh Finance, a subsidiary of HDFC Ltd, in a share swap deal amounting to ~Rs20,855cr. The amalgamation scheme is subject to approval from the Reserve Bank of India (RBI) as well as the shareholders.
The share exchange ratio for the amalgamation is 568 equity shares of Bandhan Bank for every 1,000 equity shares held in Gruh Finance. Considering Gruh Finance's closing price at Rs306 per share on Monday, its market cap works out to Rs22,411cr, whereas the deal value, as per the swap ratio, amounts to Rs20,855cr, i.e. a discount of ~7% to Gruh's CMP. As such, the deal is in Bandhan Bank's favor.
This is in line with Bandhan Bank’s efforts to dilute promoter shareholding. With this deal, the promoter shareholding in Bandhan Bank will decrease from 82.28% at present to 61%. It will also help the bank to diversify its product line into the affordable housing finance segment, which is secured lending. As such, Bandhan's new lending portfolio would comprise ~50% as secured lending.
HDFC Ltd currently holds 57.59% stake in Gruh Finance and could hold up to ~15% in the merged entity. The merger is beneficial for Bandhan Bank as it will ease dilution headwinds for the lender and help it fetch fair valuation. Further, Gruh Finance has better quality assets (its GNPA and NNPA ratio for Q2FY19 stood at 0.88% and 0.51, respectively) and its loan book has grown at ~27% CAGR over FY13-18, apart from its better financial prospects, which will bring synergy to Bandhan Bank.
In September 2018, RBI had barred Bandhan Bank from opening new branches and also froze the remuneration of its CEO -- Chandra Shekhar Ghosh -- as the latter failed to meet its shareholding norms. RBI's licensing norms require a bank to bring down promoter holding to 40% within three years of operations, and Bandhan Bank's deadline for the same was August 23, 2018. However, the bank was not able to bring down the shareholding of Non-Operative Financial Holding Company (NOFHC) to 40% as required under the licensing condition.