With 7% discount deal, Gruh-Bandhan Bank merger a growth key for the NBFC

It’s a case of West meets the East with Bandhan Bank and Gruh Finance announcing their intentions of a merger. For every 1,000 share held in Gruh Finance, investors will get 568 shares in Bandhan Bank. In other words, the swap ratio is a little less than 2:1. Since the swap ratio has been worked out on the basis of Monday's closing price, the deal is at a 7 per cent discount for Gruh Finance's shareholders.

While this did take a few analysts by surprise, given the healthy return profile and superior asset quality of Gruh Finance, they attribute the discount to the finance company's regional concentration. Gruh Finance is a non-banking finance company (NBFC), focused on western and central regions. "Given how Gruh's growth has panned out recently, merger seems essential," said an analyst.

For instance, the September quarter (Q2) results revealed how the NBFC was becoming cautious with its loan disbursements. In a bid to safeguard its capital and asset quality, the loan growth was capped at 18 per cent. Gruh Finance has also been vulnerable to shrinkage in profitability, with net interest margin falling by 30 basis points to 4.7 per cent. At these levels, profitability is way off from 6-7 per cent levels a year or two ago. Its cost to income ratio is fluctuating, and at 19 per cent, doesn't offer comfort.

Analysts at Motilal Oswal Financial Services have reduced their FY19 and FY20 earnings estimates by 5-6 per cent to factor in the drag because of higher balance sheet liquidity and higher operating costs.

Also, Gruh Finance's efforts to expand beyond its mainstay markets haven't taken off well yet. This is why Siddhart Purohit of SMC Global affirmed that the merger may be the best way to increase its footprint. "For a regional mortgage lender, merger with a bank is extremely important to broaden its network," he said.

However, what needs to be seen is whether the expansion will come at the cost of Gruh Finance's impeccable asset quality. It has managed to maintain its gross non-performing assets (GNPAs) at less than a per cent of its total loan book with zero net NPA ratio as its loan book largely comprises secured assets. Likewise, Gruh's return on assets and return on equity at 2.5 per cent and 30 per cent, respectively, are also in the top quartile among peers.

Given that the merger has taken shape retrospectively (from January 1, 2019), March quarter results will throw light on synergy benefits.

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