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|08 January, 2019

India's coerced bank M&A has financial logic too

India’s forced acquirers are holding up well

Brokers trade on their computer terminals at a stock brokerage firm in Mumbai May 13, 2014.

Brokers trade on their computer terminals at a stock brokerage firm in Mumbai May 13, 2014.

REUTERS/Danish Siddiqui

MUMBAI - India’s forced acquirers are holding up well. Orders from politicians and regulators have led to a flurry of bank M&A. Newly-listed Bandhan Bank is buying richly-valued mortgage lender Gruh Finance for about $3 billion without paying a premium. A separate three-way merger among state banks also was sensibly structured. These deals set a healthy precedent for the industry.

Consolidation in a financial sector dominated by individual and government shareholders is being fuelled by authorities. The regulator has gotten tougher with private-sector lenders, including the $34 billion Kotak Mahindra Bank, refusing to budge on deadlines to reduce the shareholdings of their powerful backers. Meanwhile, New Delhi wants fewer and stronger state banks and, so, is using combinations to bail out the weakest.

Bandhan is acting after a crackdown for missing a requirement to reduce its main shareholder’s stake below 40 percent, a condition of its 2015 licence. The fast-growing $8.5 billion microfinance lender turned bank was restricted from opening new branches and its chief’s pay was frozen in September. Now 82 percent owner Bandhan Financial Holdings will own closer to 60 percent with the bank’s all-share acquisition of Gruh, which focuses on affordable loans in rural areas.

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Despite the pressure to do a deal, Bandhan, valued at over four times book value, will absorb an even more richly valued target at a 6 percent discount to its undisturbed price on Jan. 4, before local media reported the share swap ratios. The buyer will benefit from Gruh’s higher, near 30 percent return on equity and high-quality assets. Meanwhile, the seller’s majority owner, the $49 billion Housing Development Finance Corp gets a good deal for a unit starting to compete with its own business.

Similarly, New Delhi ordered a merger of $5 billion Bank of Baroda with smaller rivals Vijaya Bank and Dena Bank. The arrangement, details of which were announced last week, gives the weakest, Dena, a bailout at a discount of nearly 27 percent, according to Elara Capital analysts. Integration issues remain, but it’s a fairer outcome for the larger, stronger lender and sets a healthy precedent that stressed banks will only be given a lifeline on tough terms. For India’s coerced bank mergers, it’s a good sign that they have some financial logic, too.

CONTEXT NEWS

- India’s Bandhan Bank said on Jan. 7 it would acquire mortgage lender Gruh Finance in an all-stock deal for 249 billion rupees ($3.6 billion).

- Gruh shareholders will receive 568 Bandhan shares for every 1,000 Gruh shares. Bandhan is paying a 6.3 percent discount based on Friday’s closing price, before local media reported a deal was imminent.

- As a result of the share swap, Bandhan Financial Holdings will shrink its stake in Bandhan Bank from about 82 percent to just above 60 percent, according to news reports. That would be higher than a 40 percent threshold imposed by the terms of its 2015 licence.

- In September, the Reserve Bank of India restricted Bandhan Bank’s ability to open new branches and froze its chief executive's pay for failing to meet the deadline.

- Gruh, majority owned by Housing Development Finance Corp, focuses on affordable home loans in rural areas. Bandhan got its start in micro-finance.

- Bandhan Bank shares closed down 5.8 percent at 498.05 rupees on Jan. 7 while Gruh Finance shares fell 4.1 percent to 306.35 rupees.

(Editing by Jeffrey Goldfarb and Katrina Hamlin)

© Reuters News 2019

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