#finacialanalysis

[3ea-global]

Financial Analysis & Impact of HDFC - HDFC Bank Merger

HDFC Bank and HDFC Ltd on 4th April 2022, announced the merger of both the entities thus setting the stage for one of the biggest deals in the Indian financial sector. The announcement of the merger resulted in a huge surge in the two firms' share values and showed a 7% bullish nature in early trading hours.

According to HDFC Bank, the transaction is expected to close within the next 18 months, subject to regulatory approvals and other customary closing conditions.

India's largest housing finance firm, with ₹5.26 trillion in assets under management (AUM) and a market capitalization of ₹4.44 trillion, would merge with HDFC Bank, India's largest private sector bank by assets and a market capitalization of ₹8.35 trillion.

What is the share swap ratio of the merger?

Shareholders of HDFC Limited, as of the record date, will be given 42 shares of HDFC Bank for 25 shares of HDFC Limited.

How will the ownership change?

Following the merger, HDFC Limited's stake in HDFC Bank will be erased, HDFC Bank would be held entirely by public shareholders and 41% of HDFC Bank will be owned by Existing HDFC Limited shareholders.

How will the merger benefit the two entities?

While this will boost the firm’s capability to cross-sell products to a bigger client base, it will also aid them to utilise distribution across urban, semi-urban, and rural areas. This combined balance sheet of  ₹17.87 trillion and  ₹3.3 trillion net worth will allow for higher scale underwriting.

Management View

Deepak Parekh, Chairman of HDFC Ltd., said that the merger process will be completed in 12-18 months and it will be a merger of equals. He believes that the housing finance business is assured to grow in leaps and bounds due to the RERA implementation, government initiatives and the infrastructure status of the housing sector. Various regulations for banks and NBFCs have been harmonised over the last few years, thereby enabling the potential merger.

He also added that the underwriting of large ticket infrastructure loans, accelerated the pace of credit growth in the economy, boosted affordable housing and increased the quantum of credit to the priority sector, including credit to the agriculture sector would be allowed by the larger balance sheet.

Customers’ interests

What is certain is that the status quo will be maintained until the merger takes effect, which could take anywhere from 12 to 18 months as authorisation will be needed by several agencies including the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI), Development Authority (PFRDA) and Pension Funds Regulatory and Competition Commission of India (CCI).

According to management, the merger could go into effect in Q3 or Q4 of FY24.  Sashidhar Jagdishan, MD and CEO, HDFC Bank, told Moneycontrol that the rates which HDFC and HDFC Bank depositors are getting will remain the same and there will be a harmonisation of the bank’s card rates after the merger happens. That is after the merger takes place, depositors will be offered the bank's rates.

Borrowers and depositors will be stuck with the status quo until then. Currently, a deposit of fewer than 2 crores with a term of two years and nine months will generate 6.15-6.35 % per year as interest. HDFC Bank offers interest rates of 5.2-5.7% per annum for comparable tenures.

As per HDFC’s distributors, the top officials will be collaborating for smooth working.

HDFC-HDFC Bank merger affecting sectors beyond banking

The effect of the HDFC-HDFC Bank merger will be for the bigger space of the Indian financial sector and will not just be limited to the banking sector. The large finance companies have practically no benefit from regulatory arbitrage. Previously, such a deal between banks and NBFCs was commonplace.

The logic of the merger is very clear — the cost of borrowing for banks is lower. Financing companies, especially house finance companies, must rely on wholesale market funding or bank borrowings, both of which are highly expensive. Above a certain size, it becomes difficult to rely solely on wholesale funding or bank borrowings.

Large finance firms may eventually be turned into banks, subject to the Reserve Bank of India’s comfort and guidelines because the shareholding of many big NBFCs is with large corporations.

As per the market, there will be good cost savings and efficiency for the merged entity, especially on the infrastructure side, after witnessing the behaviour of share prices of HDFC and HDFC Bank. They went ahead with it as they do not see any regulatory issues cropping up for the merger.