Was Gruh buyout a desperate attempt to resolve the shareholding non compliance flag raised by RBI? Very recently (Oct 2018), RBI had restricted Bandhan from opening any further branches and had also put an hold to CEO salary for failing to bring down the owner (NOFHC) shareholding to 40% (currently promoter stake at > 80%). With Gruh hardly contributing ~ 5% to either top/ bottom line of HDFC, the sale out brings nothing but a decent relief for HDFC but what for Bandhan?
Let us first compare Gruh to Bandhan. As the below graph shows, Gruh is nearly 30% of Bandhan in terms of Gross Income. Also the growth of Gruh is much less attractive compared to Bandhan, despite the lower base. But it needs to be considered than Gruh is only into home/ mortgage finance, a limited market sector which definitely is in some challenges.
But if one digs a little deeper, then a few areas of synergy that comes out:
- Better Pan India Coverage: Literally East meets west with this merger. Bandhan becomes closer to a true pan Indian bank. Currently Bandhan has ~51% of distribution in East and only ~8.5% in West. Compared to that Gruh, has 194 outltets distributed across 11 states comprising Western & Central states like Maharashtra, Gujarat, MP, Rajasthan
- Access to lower cost of deposit for Gruh: Currently, Interest expense to Total Interest income for Gruh is > 60% compared to 33% for Bandhan. Obviously, Bandhan enjoys much better spread. While due to difference in clientele & products, Bandhan will be charging higher interest rate (18-19% for Microloans and ~ 85-90% loans in this category; compared to ~10%-15% range of Grug), the lower cost of funds for Bandhan also chips in. Bandhan has cost of funds at 6.4% compared to Gruh at 7.55% (cost of borrowing). Nearly 96% of funds is sourced from deposits for Bandhan. With merger, better cost of funds, will be an immediate quick win for Gruh and hence for the merged entity as well
- Diversification of portfolio: While 85-90% of advance being Microloans for Bandhan, the entire portfolio for Gruh is home finance/ mortgage loans. This brings in significant diversity to the combined portfolio which can be of good leverage point for Bandhan.
- Better operational margin/ efficiency: Cost to income for Gruh is at ~16% which is much better than the nearly 34-35% for Bandhan bank. So, the combined entity can have better operational efficiency than Bandhan standalone.
- Lean structure: Gruh has only 692 employees, compared to >30k for Bandhan, so for Bandhan it is 30% addition to top line and ~22% addition to bottom line with hardly 2% addition to employee base
Overall, Gruh, seems to be a good buy for Bandhan, provided it makes best use of the synergy.
Note: We are not discussing the shareholding change with acquisition of Gruh. For details, one can read the ET article here. Obviously Bandhan will need to do more to resolve the issue raised by RBI on the promoter holding clause.
Source: Bandhan bank Investor presentation Sep 2018; Gruh Investor presentation Sep 2018, AR FY18 of respective organizations, newspaper reports.