India’s largest non-banking financial company (NBFC) HDFC Ltd is set to merge into its subsidiary HDFC Bank, the country’s largest private sector lender. According to a few reports, the merger will create India’s third-largest company in India and help HDFC Bank consolidate its position in the banking industry. The HDFC- HDFC Bank merger will be the largest corporate merger in India; this comes just days after Axis Bank took over Citibank’s consumer business in India.
The merger is subject to pending approvals from RBI, CCI, SEBI, NCLT, stock exchanges, and several other regulatory authorities.
HDFC has approached RBI, seeking a phased-in approach for the Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), and Priority Sector Lending (PSL).
On April 4, 2022, HDFC Ltd and HDFC Bank’s combined market capitalization surpassed that of TCS, indicating that the merger may become the second-most valued company in the country. HDFC Bank’s shares closed 9.83% higher while HDFC Ltd share price closed 9.12% higher at the end of the intraday trading session at 03:30 PM on April 4, 2022.
Following are the key takeaways for HDFC Ltd and HDFC Bank shareholders:
After the successful execution of the merger, all HDFC branches in the country will be able to offer mortgage services, and all HDFC subsidiaries will be owned by HDFC Bank.
Reports of the HDFC-HDFC Bank merger have been doing rounds since 2015, when Deepak Parekh said that the merger would be done when the time was right.
All of these rationals came together at the right time and formed a conducive environment for the merger to get a go-ahead from the board.
The proposed merger is slated to result in an array of benefits according to the officials. Some of them include:
The merger will bring together HDFC Ltd’s expertise in housing finance and HDFC Bank’s expertise in scaling, distributing, and servicing the loan.
The amalgamated entity will be able to cross-sell banking and housing finance products to its existing and new customers. Both the entities will be able to use their respective strengths to their advantage, increasing profitability.
The NBFC, upon merger with HDFC Bank, will be able to access well-diversified low-cost funding in addition to the 68 million customers of HDFC Bank. This will also give the merged entity an advantage over its peers in the banking industry.
The housing market is set to boom with Government initiatives to support affordable housing for all, RERA and infrastructure developments. The credit-strapped market is looking for credit, and the housing loan market can benefit heavily from this. The merger with HDFC Ltd will give HDFC Bank access to building a sizable home loan portfolio, which will increase the size of their overall loan books. HDFC Bank’s existing 68 million customers will be able to seek home loans post the merger seamlessly.
The merger is set to create a balance sheet of Rs 25.61 lakh crore, the second-highest after SBI. Thanks to their large balance sheet, the merged entity will be able to underwrite large-ticket loans. This will give them access to a select clientele who trusts HDFC Bank and wants to get a large-size home loan.
This would also allow the merged entity to increase the lending to priority sectors, as stipulated by the Government. This would include lending to agriculture, MSMEs, housing, education, renewable energy, etc.
HDFC Ltd VC and CEO Keki Mistry said that the merger has the potential to attract a 7-8% increase in participation from foreign investors.
The merged entity will enhance the diversity of its assets and will reduce the incumbent single product risk.
The merger is likely to happen in the second or the third quarter of FY24, subject to all approvals. It will add value to both the customers and the entities’ shareholders. However, there are massive regulatory costs that both companies will have to assess carefully moving forward.
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Research Analyst: Bavadharini KS