The Transformational Merger of HDFC Ltd & HDFC Bank
Published by Sharekhan Education | April 9, 2022
The Transformational Merger of HDFC Ltd & HDFC Bank
Amit Pathak | Sharekhan Education
The Indian financial sector witnessed a historic event recently with HDFC Ltd. deciding to merge into HDFC Bank. How will this play out? Existing subsidiaries of HDFC Ltd – HDFC Life Insurance and HDFC Asset Management Company, would become subsidiaries of HDFC Bank. And regulatory approvals aside, the completion of the merger should take approximately 18 months.
The Deal
As per the deal, shareholders of HDFC Ltd will receive 42 equity shares of HDFC Bank for every 25 shares they hold. All in all, existing shareholders of HDFC Ltd will hold 41% of HDFC Bank. Post-merger, HDFC Bank would become the second-largest financial entity in India in terms of ‘Advances’ share (15%), after SBI (~20%). Mr Sashidhar Jagdishan, CEO of HDFC Bank, would continue as the CEO of the merged entity.
Strategic Rationale
As of now, 70% of HDFC Ltd. customers do not bank with HDFC Bank. The merged entity will have tremendous cross-selling opportunities within that customer segment. Currently, HDFC Bank has 11% of the loan book in mortgages. Post-merger, that figure is expected to swell to 33%. As a result, banks’ exposure to unsecured loans will reduce. HDFC Bank would gain product expertise in the mortgage space and help reduce the cost/income ratio.
The merger will not impact the employees of HDFC Ltd. It would mitigate single product risk for HDFC Ltd. HDFC Ltd will gain access to low-cost CASA deposits, resulting in a slowdown in the improvement of the cost of funds in the mortgage business. At the operating level, branches in specific locations may merge, helping the entity save costs. Lastly, a larger balance sheet and capital base will enable larger ticket loans.
Key Challenges
The merged entity would need to adhere to CRR/SLR requirements, which would be a slight drag on the margins. As mutual fund schemes are barred from investing more than 10% in individual stocks, many mutual funds hold 6% to 9.99% in these companies individually. But as the combined weight of HDFC Bank and HDFC will be ~ 14% of the benchmark NIFTY50 index, MFs may have to sell a percentage of what they hold.
The merger is in line with the consolidation trend in the financial industry. HDFC Ltd. Chairman Deepak Parekh has summed up the merger perfectly: “As the son grows older, he acquires the father’s business” And based on the facts and figures at our disposal, we believe investors with long–term holdings may want to stay put.
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