HDFC Bank Merger: Why did HDFC merge with HDFC Bank and what this deal means for investors | India Business News

NEW DELHI: Mortgage lender HDFC will merge with HDFC Bank to create India’s third-biggest financial entity in terms of market capitalisation.
The proposed merger will enable HDFC Bank to build its housing loan portfolio and enhance its existing customer base.
Post the merger, HDFC Bank will be 100 per cent owned by public shareholders and existing shareholders of HDFC will own 41 per cent of HDFC Bank.
HDFC said that its shareholders will get 42 shares of HDFC Bank for every 25 shares of the non-banking lender held by them.
“The proposed transaction would create meaningful value for various stakeholders including respective shareholders, customers, employees, as the combined business would benefit from increased scale, comprehensive product offering, balance sheet resiliency, and the ability to drive synergies across revenue opportunities,” HDFC said in an exchange filing.
The subsidiaries and associates of HDFC Ltd will shift to HDFC Bank.
“The merger—subject to regulatory approval–is coming together of equals. The customer will be the biggest gainer,” said Keki Mistry, vice chairman and chief executive officer of HDFC, in an investor call.
HDFC Bank has a large customer base of 6.8 crore.
Shares of HDFC Bank and HDFC jumped over 10 per cent each in early trade after the entities announced the merger. HDFC Bank share were up 9.99 per cent at Rs 1,656.90 on BSE while shares of mortgage lender HDFC gained 10 per cent to trade at Rs 2,696.
What does this merger mean?
The proposed merger result in reducing HDFC Bank’s proportion of exposure to unsecured loans and also in bolstering the capital base.
“HDFC and HDFC Bank merger will be beneficial for both the companies. With this, HDFC will merge into HDFC Bank and the shareholders of HDFC Bank will become 100% shareholders of HDFC. The two firms intend to combine their capabilities with the merger, combining HDFC’s domain competence in housing finance with HDFC Bank’s better scale and distribution. This will improve the amalgamated entity’s ability to cross-sell banking and housing finance products. We have seen a positive impact on the stock prices and we believe that it will help both companies to increase their profitability as they would be able to use each other’s strength to there advantage,” said Animesh Malviya, Banking Analyst at CapitalVia Global Research.
How does HDFC gain?
For HDFC, the biggest gain will be access to well-diversified low-cost funding and a huge customer base of HDFC Bank Ltd, explained Santosh Meena, Head of Research, Swastika Investmart.
“Earlier non-banking financial corporations used to enjoy regulatory arbitrage vis-à-vis banks, but the regulatory authorities have harmonized the same, thus making this merger necessary and creating a competitive advantage over its peersm+,” he said.
How does HDFC Bank gain?
The proposed merger will enable HDFC Bank to build its housing loan portfolio. The housing loan market is at the cusp of a strong up-cycle along with tailwinds for the real estate sector, and it provides a steady secured asset class with very attractive risk-adjusted returns. This will increase the balance sheet size of the merged entity enabling it to underwrite large ticket size loans.
“Overall this is a marriage made in heaven, creating increased scale, comprehensive product offering, balance sheet resiliency and the ability to drive synergies across revenue opportunities, operating efficiencies and underwriting efficiencies, hence benefiting stakeholders of both the companies,” Meena said.
Why the sector is set for consolidation:
“Private sector banks in India need scale to cater to the latent demand for credit in the economy, in the coming decade. Therefore the sector is set for consolidation. In some cases it maybe the merger of banks with NBFCs having complimentary credit profile. The merger of HDFC and HDFC Bank was long expected as it gives the entities access to cheaper funds and franchise respectively. The merger can be a win-win for shareholders of both entities in the long term. It will especially help the merged entity counter competition,” said Tanushree Banerjee, Co-Head of Research at Equitymaster.
How do the shareholders gain?
Shareholders will also have an advantage as the share prices will increase and the companies will be more profitable. Existing shareholders of HDFC will get shares in HDFC Bank – every 25 shares held in HDFC will fetch 42 shares in HDFC Bank.
” The merger will provide the combined entity more efficiencies of scale and will bring down costs, thereby benefiting shareholders of both entities,” said Rishad Manekia, Founder, Kairos Capital.
Merged entity may be included in the MSCI Index
“Strong Robust growth in infrastructure sector in coming years especially the housing sector will prove to be beneficial. furthermore cross selling products will also increase credit growth in the economy of which the large customer base stands to be benefitted. There is also a possibility of the merged entity getting included in MSCI INDEX. Currently the stake of HDFC Bank is considered as FII, post merger the stake being reduced will be instrumental in potential inclusion, said Aanand Mehta – Vice President of Wealth Management – Koppr.
Ownership change?
After the merger, HDFC’s shareholding in HDFC Bank will be extinguished and HDFC Bank will be 100 per cent owned by public shareholders. Existing shareholders of HDFC Limited will own 41% of HDFC Bank. The market value of the merged entity will be around Rs 12.9 lakh crore,
What is the bank’s rationale for the merger?
HDFC bank said the proposed transaction will create a large balance sheet and net-worth, which would also enable underwriting of larger ticket loans, including infrastructure loans. Following the merger, HDFC Bank’s 68 million customers will be offered mortgages as a core product in a seamless manner.
HDFC has invested capital and developed skills and has set up 445 offices across the country. These offices can be used to sell the entire product suite of both HDFC and HDFC Bank.
“The combined entity will bring together complementary strengths of the two organizations, enabling a rewarding customer relationship. HDFC Bank will also leverage the long tenor mortgage relationship to offer varied credit and deposit products enabled through better insights through-out the customer life-cycle. This will result in an enhanced value proposition and customer experience for all customers of the combined entity,” the bank said.
“HDFC Bank has access to funds at lower costs due to its high level of current and savings accounts deposits (CASA). With the amalgamation of HDFC with HDFC Bank, HDFC Bank will be able to offer more competitive housing products,” it said.
The Scheme is subject to the receipt of requisite approvals from the statutory and regulatory authorities, and the respective shareholders and creditors.

Jinggo B Danuarta

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