On July 1, mortgage giant HDFC Ltd and India’s largest private bank, HDFC Bank, will merge to form a firm with a market capitalization of Rs 14.37 lakh crore. The combination will benefit both shareholders and customers when the Indian economy is seeing consistent expansion. 

HDFC Chairman Deepak Parekh and Vice Chairman Keki Mistry recently announced that the two businesses would hold separate board meetings after office hours on June 30, which will be HDFC Ltd’s final meeting.

HDFC branches would remain open after the merger, but the signboards will read HDFC Bank.

Every employee under the age of 60 will be retained, with no salary reductions. According to Parekh, HDFC Bank would require its personnel since they lack mortgage understanding. There would be no golden handshake for HDFC Ltd staff.

According to HDFC, the anticipated record date for selecting HDFC Ltd shareholders who would be rewarded equity shares of HDFC Bank based on the share exchange ratio is July 13, 2023.

According to HDFC, both HDFC Ltd and HDFC Bank are striving to complete all of the requirements for the proposed merger to be completed by the estimated timeframes.

Mistry stated that the two organisations’ goods are distinct. The bank has everything but housing, while the other solely has housing. The roles have little in common. According to Mistry, it is restricted to specific business purposes.

The merger has been approved by the RBI, IRDAI, NCLT, and India’s antitrust watchdog, the Competition Commission of India.

IRDAI has even authorised HDFC Ltd’s acquisition of HDFC Life Insurance Company & HDFC ERGO General Insurance Company, and the transfer of HDFC Ltd’s full stake in HDFC Life and HDFC ERGO to HDFC Bank.

H T Parekh, Deepak Parekh’s uncle, founded HDFC Ltd in 1977. After the RBI opened up the banking market to private investors in January 1995, HDFC Bank was established. HDFC Bank has over 6,300 branches and 18,000 ATMs globally. HDFC Ltd has 464 branches in India.

So, what prompted the HDFC twins to join together?

Three important criteria make April 2022 an ideal opportunity to proceed with the merger. The current low-interest rate environment was beneficial; the RBI had reduced the CRR and SLR requirement from 27% to 22%, and there was plenty of liquidity in the economy.

According to a source, there was another consideration and the leadership at HDFC Ltd was approaching 70, and with the question of succession looming, it was considered that a merger with HDFC Bank would provide the most synergistic advantages.

The suggestion was made even while Aditya Puri was the MD of HDFC Bank, but it could not be implemented due to a number of issues. Puri will leave the office he has held for the past 26 years on October 26, 2020.

Although there had been much conjecture, the merger was effectively kept under wraps until the official announcement.

Is the merger a good idea?

With the RBI tightening the regulatory environment for NBFCs, particularly with regard to NPA recognition standards, and making the restrictions essentially identical to those for banks, the motivation to keep HDFC Ltd and HDFC Bank separate was dwindling.

In addition, banks led by SBI and new-age fintech businesses have increased competition in the home lending industry.

However, business-related synergies may have been achieved even in the absence of the merger. The management gamble is that increasing the size of the entity’s balance sheet would allow it to boost its competitiveness and produce shareholder value. In FY2023, HDFC Ltd had a net profit of Rs 16,239 crore, while HDFC Bank made a profit of Rs 44,108 crore.

Will the merger benefit HDFC Bank?

Because HDFC Ltd’s business is less lucrative, the merger will benefit it more because it will allow it to enhance product penetration and reduce funding costs.

However, through the mortgage portfolio, HDFC Bank will have an unrivalled edge in distribution to semi-urban and rural regions, as well as a big chance to cross-sell bank products to a highly loyal client base.

According to one expert, the merged business would be able to reap significant synergy gains that will benefit both stakeholders and stockholders.

While the combined organisation may benefit from some cost savings, it is difficult to see how the merger will assist the merged entity to enhance its market share on its own. HDFC Bank has been plagued by problems with its digital endeavours, and several aspects of its retail banking are under attack from fintech firms.

In its mortgage business, HDFC is under increased pressure from public sector banks. However, an analyst believes that management has the ability to face the short-term hurdles and come out on top.

Another benefit of the merger is that HDFC’s borrowing costs would be reduced. When this occurs, the merged firm benefits from cost savings and adds value to shareholders.

And how will the merger affect shareholders?

As part of the merger, HDFC Bank would receive 42 shares for every 25 shares of HDFC Ltd. Following the merger, HDFC Bank would be 100% owned by public shareholders, with existing HDFC Ltd shareholders owning 41% of the bank. The foreign interest in the bank is around 8% and is expected to grow.

On the BSE, HDFC shares climbed 1.59 per cent to Rs 2,762.50, while HDFC Bank gained 1.38 per cent to Rs 1,658.00.

What effect will it have on the financial sector?

The competition is anticipated to intensify, particularly between HDFC Bank and SBI, India’s largest bank. Because non-performing assets are low, the house loan category has grown appealing.

According to ICICI Securities, HDFC Bank intends to treble its balance sheet in five years, with annual growth of 15%. Expanding its physical presence, it plans to double the number of branches in the next three years, focusing on digital capabilities; it plans to change the tech stack in three to four years, enhancing the product ecosystem for better customer experience and a push in newer segments (MSMEs) and geographies (rural and semi-urban areas), it said.

Further restructuring in the banking sector is predicted in the coming months. Axis Bank recently bought Citibank’s retail operations in India for Rs 12,325 crore, and the government has placed IDBI Bank up for sale.

State Bank of India held its top spot in a Standard & Poor’s rating after its assets climbed 2.64 per cent year on year to $725.08 billion. HDFC Bank’s pro forma assets increased by 57.67% to $441.05 billion as a result of its proposed merger with HDFC Ltd, allowing it to maintain second place. With total assets of $238.49 billion, ICICI Bank took third place.

What are some of the upcoming challenges?

While market observers believe the transaction was unavoidable, given the present environment and the narrowing regulatory arbitrage for NBFCs, the major problem was meeting the regulatory criteria.

According to a banker, HDFC Ltd is involved in developer finance, but HDFC Bank is not. While doing so may increase risks, failing to do so will harm the home lending industry. Developer financing is critical for obtaining mortgage customers from the project.

Conclusion.

HDFC Ltd, a housing financing corporation, and HDFC Bank, a private retail bank, are slated to merge on July 1, creating a mammoth organisation. How and why did the merger happen, and what will change after the two corporations merge?