On April 4, HDFC and HDFC Bank announced that their boards of directors had approved an all-stock merger of the former into the latter to form a banking monstrosity to better tap the rising credit demand. The move was abrupt and caught everyone off guard, with markets cheering the merger and stock prices skyrocketing.
How big will it be on a global scale?
It will be India’s second-largest bank after the State Bank of India (SBI) once the merger is approved by regulatory authorities. Also, it will be twice the size of ICICI Bank, the country’s third-largest bank. The combined banking beast’s balance sheet will be valued at over Rs. 17 lakh crore, with a net worth of over Rs. 3 lakh crore. In addition, the bank’s loan size will increase by 42% to Rs. 18 lakh crore ($237B), retaining its position as the country’s second-largest lender. In short, the bank will be able to expand its lending portfolio as the mortgage portion will climb to over 33%.
The HDFC twins fall under the top 10 companies in India according to their market cap having over Rs 11 lakh crore as of May 6th, 2022. On the day of the merger announcement, it soared to Rs 13.99 lakh crore, surpassing TCS’ m-cap of Rs 13.94 lakh crore. HDFC twins’ stocks had risen by more than 10% that day.
Another significant benefit for the bank will be the ability to cross-sell to HDFC customers, allowing it to increase its product portfolio. The company’s earnings per share (EPS) would skyrocket in the first year after the merger.
With a $190B valuation, the combined entity would be the world’s fifth most valued lender. JP Morgan Chase is currently the most valued lender followed by Bank of America, and Industrial and Commercial Bank of China. Also, it stands second biggest firm in terms of deposits and loans.
The merger might help India’s banking industry attract more international investment, as the combined entity’s foreign shareholding will be between 65-67%, leaving a 7% gap to the 74% foreign ownership limit in India’s banks.
What does the merger imply for the consumers?
Customers of HDFC Ltd and HDFC Bank will receive the added benefits of both companies, including savings accounts, mortgages, life insurance, health insurance, general insurance, investment products, credit cards, and personal loans.
- Following the merger, HDFC Bank will be 100% owned by public stakeholders. Existing HDFC Ltd shareholders will possess 41% of HDFC Bank and will obtain 42 HDFC Bank shares (face value of Rs 1 each) in exchange for 25 HDFC Ltd shares (face value of Rs 2) with a ratio of 1:1.68. HDFC Bank will take over HDFC Ltd and its subsidiaries, its biggest stakeholder, in what’s being marketed as the largest transaction in Indian banking history.
- HDFC Bank customers who do not currently have a mortgage product will be offered one as a core product in the future, with a seamless experience, of course. HDFC’s rural and affordable housing financing will assist the bank in meeting priority sector lending (PSL) standards. It will help the firm reduce its unsecured loan risk.
- A housing finance structure’s cost of funds will be higher than a banking structure’s cost of funds. As a result, when we shift to a bank, our overall cost of capital to service will decrease.
- Customers who have made fixed deposits with HDFC Ltd with an auto-renewal mandate will likely be allowed to withdraw the money or renew the deposits with HDFC Bank at the current interest rate. However, after customers renew their FDs, there will be a considerable benefit from increased deposit safety.
- Consumers will have access to a far larger and more comprehensive banking platform than they currently have and will have access to approximately 45 years of experience in making housing loans, which will be reflected in an extraordinarily low-cost structure and a vast quantity of expertise and asset quality over time.
- If a consumer has taken a loan from HDFC Ltd, then it is likely that there will be no impact on the terms and conditions. However, once the merger is approved, the interest rate charged on your home loan will likely be revised. Interest rate fluctuations will be more transparent for floating rate loan borrowers.
- The housing loan market is on the verge of a robust upswing, with all-time high positive industry fundamentals, and it offers a secure asset class with attractive risk-adjusted returns.
The move seems beneficial to everyone, ranging from customers to investors and the banking system as a whole. Regulatory changes and reforms have created a favorable atmosphere for the merger of the twins, resulting in a “win-win” situation for all stakeholders.
Written by: Arpita Chatterjee
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