Bandhan Bank & Gruh Finance Merger Analysis

The merger of Bandhan Bank and Gruh Finance has been announced, but it hasn’t been approved yet. They have given the merger application to the RBI. Will have to wait to see what happens ahead.

Reason behind the Merger

The promoters of the Bandhan bank have to reduce their stake (from 82.3% to 40%). And this is their first try in downsizing their stake. If this merger goes through, then their promoter holding will go down from 82.3% to 61% holding in the merged entity.

Conditions of the Merger

One will get 568 Bandhan bank shares for every 1000 Gruh Finance shares held.

Comparison Between the 2 Merging Entities

• Number of branches data is as per their September 2018 results. Bandhan bank will get presence in the west because of Gruh Finance branches, and Gruh Finance will get presence in the east because of Bandhan bank branches. This is a very good synergy between the two.
• Gruh Finance is a NBFC that is why it has less employees. And Bandhan bank is a full-fledged bank which is why it has so many employees.
• The advances of Bandhan bank are almost double than those of Gruh Finance. Gruh finance has more market in affordable loans. Plus, Gruh Finance has a very strong experience and a very good system of managing all the aspect regarding to loans. Thus, this will be very valuable to Bandhan bank.
• As Gruh Finance is a NBFC it faces challenges to raise deposits as it has high cost of deposit. On the other hand, a bank has savings account, current account, etc., which is why their cost of deposit is very less compared to a NBFC. Here, being a bank, Bandhan bank gains advantage.
• As being a bank, the Capital Adequacy ratio of Bandhan bank is 32.60%, which is very high and also above the limit of the RBI. So, when these entities get merged this ratio will come down.
• Even after being a NBFC, Gruh Finance has kept its Gross NPA in a very good control. And we all know that NBFC’s faced some issues in the recent past. That time Gruh Finance did not face much issues as compared to other NBFC’s.
• Assets here are the loans given out by the banks and the NBFC’s. Here, Bandhan bank scores well as cost of raising money is high for Gruh Finance.

Market Capitalization

• Promoter of Bandhan Bank is Ghosh family and their stake in the bank is 82.3%. So, their stake is worth Rs. 47,700 crores (82.3% of 58,000 crores)
• Promoter of Gruh Finance is Housing Development Finance Corporation (HDFC Ltd.) and their stake in the NBFC is 57.3%. So, their stake is worth Rs. 11,276 crores (57.3% of 19,500 crores)
• After the merger, the market cap will become 77,500 crore rupees.

Here, the stake of HDFC will be 14.96% in the merged entity, which will be 11,594 crore rupees. And that of Bandhan bank will be 61% which will be 47,275 crore rupees.

According to the new RBI rules, HDFC cannot hold more then 10% in Bandhan bank. But HDFC will have to get their stake down by at least 5%. Will have to see what the RBI approves and permits in this merger.

Final View on this Merger

According to the analysis done above, the ultimate winner in this merger is Housing Development Finance Corporation (HDFC Ltd.).

Why this is so? Because Bandhan bank promoters were directed to reduce their holding and no promoter likes to sell out their stake. If that is done it can also have negative impact. Gruh Finance was an over-valued entity. Its P/E ratio or P/B ratio are very high in comparison with their competitors.

Bandhan bank had to reduce their stake. So, to do so and to also avoid the negative impacts by selling their stake in the market, it decided to merger with Gruh Finance with such high valuations.

HDFC was always questioned as to why they were running 2 entities (HDFC Ltd & Gruh Finance) simultaneously. Because of this HDFC couldn’t enter the affordable housing loans aggressively. HDFC could not use the full potential of Gruh Finance because of restrictions.

In this merger, a lot of desperation can be seen from Bandhan bank as they have to reduce their stake and the deadline was nearing. They had also earlier tried to buy PNB Housing Finance similarly, but it didn’t go through. But here they have given proposal to Gruh Finance by giving them premium valuations. Now will have to wait and watch RBI’s reaction on this.

Therefore, the real winner in this deal is neither Bandhan bank nor Gruh Finance. It is HDFC Ltd.

So, our suggestion to investors will be to keep HDFC Ltd on their radar rather Bandhan bank or Gruh Finance.