HDFC Bank to merge with HDFC Ltd.
The much-anticipated merger between HDFC Bank and Housing Development Finance Corporation (HDFC Ltd.) came into effect on July 1, according to a statement by HDFC Bank.
The merger between HDFC, India's oldest and largest mortgage lending firm, and HDFC Bank was announced on April 4, 2022. With HDFC acquiring a 41% stake in HDFC Bank through the merger, the deal has attracted attention since its potential was first mentioned in 2015.
The boards have designated July 13 as the record date to determine eligible shareholders for share allotment. This consolidation is expected to establish a dominant force within the Indian banking industry.
Key Points to Know About this Mega-merger
Here are the prominent points to note about the HDFC Ltd. and HDFC Bank merger -
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Share Allotment
Under the merger terms, eligible shareholders of HDFC will receive 42 new HDFC Bank shares for every 25 shares held in HDFC Ltd.
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Transfer of Commercial Papers and Non-convertible Debentures
All commercial papers and non-convertible debentures of HDFC Ltd. will be transferred to HDFC Bank on July 7 and July 12, respectively.
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Leadership and Loan Book Expansion
HDFC Bank’s CEO, Sashidhar Jagdishan, will lead the combined company, while HDFC's Keki Mistry and Renu Sud Karnad will join the bank's board. The merger will expand HDFC Bank's loan book to over 22 trillion rupees, establishing it as the second-largest lender in India.
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Comprehensive Financial Services and Branch Network
The merger will enable the newly formed entity to offer a wide range of financial products and services, including banking, insurance, and mutual funds. It will also result in an expanded branch network with over 8,300 branches and a large workforce.
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Subsidiaries' Integration into HDFC Bank
As part of the merger, all subsidiaries of HDFC, including HDFC Life Insurance and HDFC Asset Management Company, will become subsidiaries of HDFC Bank.
What will happen to HDFC Branches?
After the merger between HDFC Bank and HDFC Ltd., the branches of HDFC Ltd. are undergoing rebranding to align with the HDFC Bank brand. The offices and branches of HDFC Ltd. are expected to have the HDFC Bank look.
Why the Merger?
Some significant reasons behind the merger are -
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Regulatory Convergence and Alignment
The merger is a strategic response to regulatory changes introduced by the Reserve Bank of India, aiming to tighten regulations for Non-Banking Financial Companies (NBFCs) and housing finance companies. This convergence of rules makes it less viable for HDFC Ltd. to operate as a separate entity.
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Leveraging Cross-Selling Opportunities and Customer Base
The merger between HDFC Bank and HDFC Ltd. creates a powerful synergy, combining HDFC Bank's extensive branch network with HDFC Ltd's strong customer base in the housing finance sector.
This strategic advantage enables the merged entity to cross-sell a comprehensive range of banking and housing finance products to both existing and new customers - maximising strengths, increasing profitability, and offering a broader array of financial solutions to a larger customer segment.
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Strengthening Competitive Position in the Mortgage Business
The new entity gains a competitive edge in the mortgage business by merging HDFC Bank's banking infrastructure with HDFC Ltd's expertise in the housing finance market.
This positions the merged entity as a formidable player capable of serving the housing finance market more effectively.
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Reducing HDFC Bank’s Exposure to Unsecured Loans
The merger brings together HDFC Ltd’s expertise in housing finance and HDFC Bank’s expertise in scaling, distributing, and servicing loans.
How Does this Merger Benefit the Merged Entity?
The proposed merger is said to result in several benefits, including -
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Low-cost Funding for HDFC Ltd.
By joining forces with HDFC Bank, HDFC Ltd. capitalises on the current low-interest rate environment, enabling a smooth transition into the banking sector.
The merger provides access to a well-diversified and low-cost funding base, along with the extensive customer base of HDFC Bank, positioning the merged entity as a strong player with enhanced financial capabilities.
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Building a Home Loan Portfolio
With the housing market poised for growth due to government initiatives supporting affordable housing, RERA regulations, and infrastructure developments, HDFC Bank seizes the opportunity to build a substantial home loan portfolio.
This strategic move increases the size of their overall loan books and allows HDFC Bank's existing 68 million customers to access home loans post-merger seamlessly.
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Underwriting Large-ticket Loans
The merger resulted in a Rs. 25.61 lakh crore balance sheet, making it the second-highest after SBI.
Capitalising on their large balance sheet, the merged entity gains the ability to underwrite large-ticket loans. This positions them to cater to a select clientele that trusts HDFC Bank and seeks substantial home loans.
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Expediting Priority Sector Lending (PSL)
The merger enables the merged entity to enhance lending to priority sectors, as mandated by the government. This includes sectors such as agriculture, MSMEs, housing, education, renewable energy, and more.
The merged entity contributes to the country's developmental goals by prioritising these sectors.
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FII Interest
Keki Mistry, VC and CEO of HDFC Ltd., believes that the merger can potentially attract a 7-8% increase in participation from foreign investors. This heightened FII interest reflects confidence in the merged entity and its growth prospects.
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Diversity of Assets
The merger enhances the merged entity's asset diversity, reducing the risk associated with relying heavily on a single product. This diversification strengthens the overall financial stability and resilience of the merged entity.
Conclusion
The completion of the highly anticipated HDFC Bank-HDFC Ltd. merger has brought a sigh of relief to investors. This strategic move is set to create the fourth-largest lender in the world, with a staggering estimated market capitalisation of $172 billion.
Not only does this merger mark a significant milestone in the Indian financial sector, but it also presents immense opportunities for growth and expansion. By combining their strengths, HDFC Bank and HDFC Ltd. are poised to offer a comprehensive range of financial products and services, leveraging their extensive branch network and strong customer base. This transformative merger sets the stage for an exciting future in the global banking landscape.