Bandhan Bank & Gruh Finance Merger & Entry into MSCI Index

Inclusion of Bandhan Bank in MSCI Index – Merger Effect

Introduction

Bandhan Bank & Gruh Finance Merger is approved by NCLT’s (National Company Law Tribunal) Kolkata and Ahmedabad benches. 17th October 2019 is fixed as the record date for the effective merger.

Bandhan Bank & Gruh Finance Merger Approved (To Merge on 17th October 2019)

Merger Overview

• Objectives of Merger
  1. Lower Bank’s Promoter Holding :
     • The merger will reduce the promoter stake in Bandhan Bank to 61%, from 82.26% as a first step towards finally reducing to 40% as directed by Reserve Bank of India (RBI) based on norms for holding of promoters in private sector bank.
     • Thus, after getting approval from NCLT’s (National Company Law Tribunal) Kolkata and Ahmedabad benches, then Bandhan bank’s promoter holding will go down from 82.26% to 61% holding in the merged entity effective from 17th October 2019.
  2. Expand Housing Finance Portfolio :
     • This merger is going to give Bandhan Bank a ready-made home finance company, Gruh Finance to diversify business.
• Share Swap Ratio
  • The share swap ratio is 568 shares of Bandhan Bank for every 1,000 shares of Gruh Finance.
  • The share swap ratio is in line with six-month weighted average stock price of the two companies.

Inclusion of Bandhan Bank in MSCI Index – Merger Effect

• Bandhan Bank will be added in the MSCI (Morgan Stanley Capital International) Index of India with effect from 16 October. This inclusion in MSCI index is due to Gruh Finance’s merger with Bandhan Bank.
• The move is likely to result in $180 million (Rs.1,300 Cr) worth of inflows.

Shareholding Pattern of Bandhan Bank

Who Is Going to Gain from This Merger & What?

For Promoters of Bandhan Bank

• The merger enables Promoters of Bandhan Bank to dilute their stake without actually selling any shares and get strong housing finance portfolio though at premium.  Though they still need to dilute stake further but may be when they dilute now can get better price for their sale.
• Also, They will be able to scale up the business both in east and west by cross selling the products. They get HDFC as a very strong partner or promoter.
• The merger may look at premium price for Bandhan Bank in the short term. But if scale-up of business continues to remain profitable then it can provide benefits in the long run to all stakeholders.

Great Business Synergy for Bandhan Bank as well as Gruh Finance

• The merger will help Bandhan Bank diversify its product basket and de-risk portfolio by addition of secured loan products.
• For Bandhan Bank, merger is getting ready made business. Also in the process walk towards the compliance by getting reputed Company like HDFC as its shareholders. 
• In terms of manufacturing business,
  1. Geographical expansion
  2. Product diversification
  3. Getting strong infrastructure and client base
  4. Big opportunity for cross selling the products
• Also raising funds for deposits and improving gross and net interest margin. It is possible for the bank to increase its CASA deposit post-merger. Since existing clients of Gruh Finance may be attracted to shift its normal banking operations to Bandhan Bank.
• The biggest advantage of the merger for Bandhan Bank will be a sharp increase in the secured loans. Post-merger, the share of unsecured loan book of Bandhan Bank will decline to 57% from 86%.
• Also, expertise of Gruh Finance can be utilized to cross-sell products. The merger will enable Bandhan Bank to reduce risk arising out of geographical concentration, diversify its product portfolio, and still target the under penetrated market.
• Bandhan Bank is well positioned to deliver a 23% CAGR in micro-finance loan book over next 4-5 years, driven by :
  1. Continued growth in credit demand from existing customers
  2. Increasing penetration and expansion into new geographies and
  3. Further market share gains from micro-finance lending
• Bandhan bank’s strategy to diversify the geographic and lending mix will be helpful and its ability to collect deposits from its borrowers would also give it more information about the borrowers, thereby reducing the risk.

For HDFC Ltd.

• One of the biggest winner of the merger is HDFC Ltd. HDFC is able to get an exit from its subsidiary at good premium and is able to participate in the growth of the merged entity though as minority shareholder. 
• HDFC has been able to monetize its investments in Gruh Finance at a very attractive valuation which is 13.3 times the trailing book value.
• The merger helps HDFC Ltd avoid a potential conflict of interest as both the parent and Gruh Finance are in mortgage financing. Now, HDFC is having a great opportunity to organically expand into the affordable housing segment. There has been an overlap in business of both Gruh Finance and HDFC Ltd, especially in the western region.
• The RBI’s rule does not allow a promoter of one bank to hold more than 10% stake in another bank. As HDFC will hold 15% stake in Bandhan Bank, it will have to reduce its stake in the future. 

Conclusion

• Bandhan Bank achieves geographical expansion, product diversification, regulatory compliance stake dilution and getting HDFC as stakeholder in this merger.
• Whether it will deliver superior value to public shareholders or not will depended how product and cost of funds synergies are captured post-merger.