Newest Indian Bank Plans $11.7 Billion Merger to Meet Rules

(Bloomberg) -- Bandhan Bank Ltd., India’s newest lender, will combine with mortgage financier Gruh Finance Ltd. in a $11.7 billion deal, bringing the bank closer to meeting shareholding rules and helping it accelerate expansion.

Investors in Gruh Finance, controlled by Housing Development Finance Corp., India’s biggest mortgage lender, will get 568 shares of Bandhan Bank for every 1,000 they own, according to exchange filings from the companies. The deal is valued at about 818 billion rupees ($11.7 billion), calculations based on closing share prices on Monday showed.

The transaction is meant to help Bandhan Bank founder and Chief Executive Officer Chandra Shekhar Ghosh comply with the Reserve Bank of India’s ownership rules, and will also allow the micro lender to expand into a new category of loans. India’s regulator has censured lenders for not meeting norms as the central bank tries to clean up an industry that’s been plagued by as much as $210 billion of stressed assets.

Read an Indian court’s view on another bank’s attempt to dilute ownership

Shares of Gruh tumbled about 16 percent on Tuesday as the share-swap ratio was at a discount to its Monday closing price. Bandhan Bank lost 3.7 percent, as the deal prompted investors to reassess the value of the lender, according to Bunty Chawla, an analyst at Batlivala & Karani Securities Pvt in Mumbai.

“With the swap ratio finalized, now the the price for Gruh will be completely dependent on the Bandhan Bank share price,” which looks overvalued given its price-to-book ratio, according to Chawla. The bank is trading at more than six times the book value of its assets, data compiled by Bloomberg show.

Seen Positive

Others see the deal as positive for Bandhan and Gruh as well as HDFC. The merger will boost the three lenders’ profiles, resolve conflicts of interest and accelerate expansion in affordable housing, according to analysts at Sanford C. Bernstein & Co. and Citigroup Global Markets Inc.

“Diluting shareholding is just one benefit of this merger; the main purpose is to grow our business in the best way possible,” Ghosh said at a media briefing in Mumbai on Monday. “We have a strong presence in the east of the country, Gruh has a good network in the west. It is good for both of us.”

The founding group’s -- Bandhan Financial Holding Ltd. -- stake in the lender will fall to 61 percent from 82 percent after the combination. The central bank imposed penalties on the Bandhan Bank after it missed a September deadline to bring the group’s holding in the lender down to 40 percent, in line with bank ownership norms. The RBI froze any further increases in his pay and withdrew the bank’s right to open new branches without seeking prior approval.

“Promoter holding of around 61 percent despite the acquisition implies there could be more dilutive deals to meet regulatory requirements,” Pankaj Agarwal, an analyst at Ambit Capital, wrote in a note published Tuesday.

Here are more details from the transaction:

  • Combined unit will have a loan book of 500 billion rupees, according to pro-forma data
  • Micro loans will make up 58 percent of the total; home loans will be 28 percent
  • Merged entity will have 4,182 outlets and 31,000 employees

Kolkata-based Bandhan Bank started as a microfinance firm in 2001 and converted to a bank in 2015 as India approved new licenses in an effort to tap rural savings and improve access to credit.

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