Newest Indian bank plans US$11.7b merger to meet rules

Mumbai

BANDHAN Bank Ltd, India's newest lender, will combine with mortgage financier Gruh Finance Ltd in a US$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 (HDFC), 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 (S$15.9 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 (RBI) 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 US$210 billion of stressed assets. Shares of Gruh tumbled as much as 15 per cent on Tuesday as the share-swap ratio was at a discount to its Monday closing price.

Bandhan Bank slid as much as 5.5 per cent before paring the declines, 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 finalised, now the price for Gruh will be completely dependent on the Bandhan Bank share price," which looks overvalued given its price-to-book ratio, Mr Chawla noted.

The bank is trading at more than six times the book value of its assets, data compiled by Bloomberg show.

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," Mr 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."

Mr Ghosh's stake in the lender will fall to 61 per cent from 82 per cent after the combination. The central bank imposed penalties on Bandhan Bank after it missed a September deadline to bring Mr Ghosh's holding down to 40 per cent, 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. BLOOMBERG