HDFC Merger: Why HDFC is Merging with HDFC Bank? (Complete Story)

Harshit Verma Harshit Verma
Apr 6, 2022 12 min read
HDFC Merger: Why HDFC is Merging with HDFC Bank? (Complete Story)

The covid really shook the economies of the whole world. Not just the countries that are developed suffer but also the countries that are developing and are already poor. This shock was instant and the world market crashed as soon as the pandemic hit the world.

Businesses all over the world that did not have stability got dissolved in the storm and the remaining were absorbed by big businesses. From that time to the current time, all efforts have been to revive the market. There was a lack of funds all over the world, which the government and businesses tried to fill.

As the Covid 19 pandemic curve flattened, and the markets got to their normal workings, the world saw a sign of relief. Then, Russia attacked Ukraine and we all witnessed another unstable time.

All of that happened in the past two years and all that was balanced by the efforts of some entrepreneurs all over the world. Money was an important asset in these times. Banks worked overtime to get money into the hands of people. Many banks’ growth staggered due to the no of work in the sector. Since then every bank has been trying to cope with all the unemployment and money problems in the market.

In recent news one of the most popular banks in India decided to merge itself with another entity to gain more power. The bank was none other than HDFC bank, which is among the biggest banks in the economy. This article tries to cover everything about the news on the HDFC merger with another HDFC entity. Let us see in close detail what the news really meant in this case.

About HDFC
HDFC Merger with HDFC Bank
What Took HDFC So Long to Merge With HDFC Bank?
Benefits of the HDFC and HDFC Bank Merger
The Current Situation of HDFC
Impact on HDFC Mutual Funds
Swap Ratio of HDFC
Cost Optimisation of HDFC

About HDFC

HDFC bank limited is an Indian private banking company that deals in all sorts of financial services. It is headquartered in Mumbai. HDFC Bank is India’s largest private bank in terms of assets. HDFC bank is also the tenth largest bank in the world in terms of market capitalization as of April 2021. It is also the fifteenth largest employer in a country as big as India which nearly employs 120,000 employees. It is also the third-largest company by market capitalisation ($122.50) billion on the Indian stock exchanges. All and all, HDFC is a big deal in the Indian economy market.

HDFC Merger with HDFC Bank

The news that shook the market for two days in a row now is about HDFC bank. The HDFC bank has announced a merger with the HDFC. This merger of two big organisations will be the biggest merger in Indian corporate history. After the amalgamation, the parent company (Housing finance company) will merge with the banking arm of the company, which is HDFC Bank.

The rumours of this merger happening have been recorded for a long time now. In fact, the merger has been speculated to happen in the year 2014. Thus, we can see that the deal that turned into the news yesterday has been in working progress for many years.

The agreement on the merger has moreover mentioned that the parent company of HDFC, that is HDFC will sell some proportion of its loans to the bank every quarter. For the HDFC bank, this was previously the only touchpoint to home loans. The parent company works in the complementary business of the home loan business and the bank arm works as a lending bank for the public. Both entities will now work together to make more sense of the business that they are into.

What Took HDFC So Long to Merge With HDFC Bank?

For the most notable past, national housing banks were regulated by HDFC. HDFC or the housing finance companies were the regulating bodies for all these sorts of banks and they had easier Norms and rules and regulations to follow, which made managing these corporate entities easier to handle and manage.

As time went by and bad loans accumulated and several other events debunked the housing finance sector, things changed. With the collapse of the DHFL and the fall of other lenders and mortgage providers like Reliance housing finance, the Reserve Bank of India came to the rescue. The RBI took over control and started to impose strict guidelines for the whole housing finance sector.

It was easy for a company like HDFC to manage itself but now, as the norms changed, it was becoming heavier to manage such a big organisation. Thus, they thought to merge the HDFC limited and the private lending arm. The merger has its benefits like,

  1. Statutory liquidity ratio
  2. The adequate cash reserve ratio
  3. Compliance with priority sector lending norms

The reason for the time that it took to merge both these organisations was the size of their books. HDFC limited and the bank’s book was huge and it was difficult to plan the merger which took time.

There was also some speculation about the person who will guide the merging body. It was long in the works and it finally is seen to have settled a little. There will be many benefits from the merger like the cost of capital is going to be lower due to the synergy with which the company will operate.

Another good aspect is that interest rates will be low, in fact, they will be the lowest as compared to some past decades. As the companies, HDFC and HDFC bank have a large stock of liquid assets in their inventory, they will provide a good financial backbone to both entities.

Benefits of the HDFC and HDFC Bank Merger

The news was obviously not enough to set up the theme of reason. Here we will be listing the benefits that the bank will be seeing in the future and the reason why they are looking positively for a merger in the home loan and the bank of the same parent organisation. Let us see how the merger is going to be beneficial and the normal benefits of a merger first.

Safety and Profitability

A merger can be very beneficial and it can secure the resulting organisation to a great extent which ensures safety and profitability. A merger lets the existing shareholders reorganise the shares of the entity and make a better arrangement for the resulting entity.

Stronger Entity

Another reason for a merger can be that the resources of both the companies and entities add on and they become stronger as an entity. Many companies also enter into a merger or amalgamation to enter new markets to diversify their portfolio of products which will enhance the profitability and profit-making capability of the company. Other ways companies want a merger is to get some assets from other companies which would have taken much time to buy or set up in their organisation.

Taxes

Merging with another company also helps many times, saving tax by lowering the tax liability that is generated for every company. A merger can also be used to eliminate competition between two entities that work in the same sector of products and are fierce in their quality controls department. By the way, companies like these can work towards the same goal of profitability with more strong arms and assets. This merger will also help in better planning and utilisation of all the financial resources that both the companies entail.

The HDFC amalgamation has a lot to do with these above-listed benefits. In fact, apart from the benefits listed above, this merger will have more unsaid benefits like,

Benefit to Investors

The amalgamation between the parent organisation and the banking division or arm is going to persuade more investors to stay invested in this joint venture. This move of merging will provide synergy to both the individual entities and will help foreign investors give more abundance to invest into.

High EPS

The merger or the amalgamation will also help in increasing the EPS of the bank. EPS here refers to earnings per share and is a financial metric to judge a company. In normal circumstances, a company with a high earning per share is considered more investing worthy than a company with a low earning per share (EPS).

Stock Price

Another small-term benefit for both entities was that the stock of both companies rocked on the stock market. The stock of HDFC bank closed at a 10 percent higher rate, which valued the private commercial bank at a valuation of 9.2 lakh crore. On the other hand, the stock of HDFC which is a housing finance company rose about 9.2 percent and landed the company at a valuation of almost 5 lakh crores.

HDFC-Bank-and-HDFC-Limited-Share Price
HDFC Bank and HDFC Limited Share Price

These were some of the most noticeable benefits that Both the merging companies will get if they work in synergy. After the IL&FS crisis, that happened in 2018, the apex bank of India, that is the Reserve Bank of India has been forcing NBFCs or Non-Banking financial institutions to be more of a bank.

According to the rules of the Reserve bank of India, they are mandated to set aside a good chunk of money as reserves to ensure precaution against thefts and frauds. This made managing NBFCs a little harder and more challenging.

HDFC Chairman Deepak Parekh admitted that the bank-like regulations for NBFCs were the final nudge for the merger and it was the core point that triggered this big sort of a merger between the parent organisation of HDFC and the private lending arm of HDFC.

HDFC chairman Deepak Parekh said shareholders of HDFC will get 42 shares of HDFC Bank for every 25 shares held. HDFC's 26% stake in HDFC Bank will be extinguished as per the terms of the merger. HDFC Bank will be 100% owned by public shareholders, with existing shareholders of HDFC Ltd owning 41%.
"Change is inevitable, but is welcome when it is beneficial to all the stakeholders. The merger not only makes the combined entity strong enough to counter competition but makes the mortgage offering more competitive," said Parekh.

All these reasons really enlist the core set of reasons which led HDFC to merge with its private lending arm HDFC bank and is set to become the biggest merger in the history of Indian corporate history.


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The Current Situation of HDFC

The current status of HDFC is worth a watch. The private lender department or the HDFC bank’s loan book now stands at about 12 lakh crore. One of the current goals of the banking arm is to naturally jump to 18 lakh crore and this is not an easy task. Definitely, the merger will help in adding resources, both financial and synergic. This task will involve some tight arrangements between profitability, asset quality and the growth of the organisation.

This is another benefit that is often unlisted in this famous merger. Roping in the parent organisation of HDFC will help the banking arm get some relief from the tight arrangements of its books. It will be an easier and more economical option for the entity.

Another aspect of the merger can be seen in the private loan lender participant in the amalgamation. The bank, whose total value of home loans stands up at about 11 percent, will jump and magnify to 33 percent.

The other effect of the merger will be that it will make HDFC bank the second largest bank in India. It is a great feat for a private lender like HDFC and is further expected to increase the value of the lender. While the space between the HDFC Bank and State Bank of India would be around 6 to 7 lakh crore. ICICI Bank on the other hand would be a distant third in the order, that too with a gap of over β‚Ή10 lakh crore. Thus, the position of the HDFC Bank is quite sure to get better. Β 

"Change is inevitable but is welcome when it is beneficial to all the stakeholders. The merger not only makes the combined entity strong enough to counter competition but makes the mortgage offering more competitive," said Deepak Parekh who is the current HDFC Chairman.

Over the years, HDFC Bank has outgrown its parent both in terms of valuation as well as asset size. "The proposed merger will benefit the economy in many ways. A larger balance sheet and a larger capital base will allow a greater flow of credit into the economy," said Parekh.

If we look at the Definitive data, it will mark the largest banking sector M&A globally since April 2007. S&P Global Ratings said the deal would create an entity twice the size of ICICI Bank.

Impact on HDFC Mutual Funds

Before the merger, HDFC limited and the HDFC bank had about 5.66 percent and 8.43 percent share in the Nifty 50 which was a big anchor for both organisations. Now, after the merger, their combined efforts of merging the organisations into one single entity have resulted in a share of 14 percent in Nifty 50. However, a rule states that exposure for a single stock cannot exceed the 10 percent cap in a mutual fund scheme portfolio and this merger as we can see breaks the limit.

As a result, mutual funds may have to remain underweight on the stock and that will lead to its own repercussions. One of the repercussions is that the fund managers will not be able to benefit from the outperformance of the merger, which can turn out to be a dealbreaker for many managers. Unless the weight of the stock lies under the cap of 10 percent, according to the rule, these mutual funds are expected to underperform the market.

Swap Ratio of HDFC

What is the swap ratio? The meaning is hidden in the words given above. Swap means to take part in the exchange for something. In a more formal way, a swap ratio is a ratio, which is basically the exchange rate of the shares of the company that go and form a merger. This ratio is calculated by the valuation of various assets and liabilities of the merging companies.

In the case of the HDFC parent organisation and the HDFC Bank, the swap ratio will be somewhat tricky. The merger has a lot of complexity and it was speculated to be in process for about a decade now. First, the regulatory body will have to give a nod to the HDFC group to set the merger in a running state. After that, the process could take about 14 to 18 months and with this data, Β the merger process is expected to be complete by the end of the financial year 2021.

The swap ratio will look like this, 1:1.68. That can be interpreted as, for every twenty-five shares held in the HDFC limited (the parent organisation), Forty-two shares of the bank will be allotted.

Cost Optimisation of HDFC

One of the major benefits of a merger is cost optimization. In this scene, it is expected that the cost will be optimised, but in the long run. As two big organisations join hands to operate in synergy or harmony, costs are mostly expected to go down. This is also expected in the HDFC case too. However, as the organisations are big and strong, cost optimisations will happen in the long term. It will take some time for the cost optimization to show and reflect.

Some experts are also speculating that if the merger worked in a short span and got established, it will be a drag on the HDFC bank. It means that if the merger is established and started working together by the end of the financial year 2025, then it will drag the costs of HDFC Bank. The cost of statutory reserves is increasing and the home loan segment is not too strong in the short span of time. As both are getting merged, they are expected to generate a net interest margin of four percent. HDFCs bank books might not look good in the initial years of operations, as the merger turns out fresh but it is expected to benefit in the long term.


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Conclusion

So what will be the end result of the merger? The answer is hard to say, as we should try to look long term but we can see what the results will be in the short term of time. The stakeholders or the investors of HDFC limited will get shares of the HDFC bank. This is good news for all the investors of HDFC Limited as they will get shares of HDFC bank, and it is a good deal overall.

Investors of HDFC Limited will get 41 per cent shares in the merged bank. On the other hand, the shareholders of HDFC Bank will get access to the loan department of the company. This merger will give them access to a large loan base which is the sector maintained by the parent organisation, HDFC limited.

All these are the result of mergers happening in two big entities in India, HDFC limited and the private banking arm of the same organisation, HDFC Bank. This merger is said to be the biggest merger in the history of corporate mergers in India. It will be a benefit to both the participating organisations, HDFC limited and the HDFC bank. In these times of uncertainty, mergers like these can be a big relief to the economy.

FAQs

Which bank is merging with HDFC Bank?

HDFC Ltd is merging with HDFC Bank.

Why HDFC is merging with HDFC Bank?

HDFC Ltd is merging with HDFC bank so that it can become a stronger entity in terms of market capitalization and become the second-largest bank in India.

Are HDFC and HDFC Bank different?

Yes, HDFC Ltd is a housing finance corporation that provides loan products while HDFC bank is a private sector bank that provides banking-related services.

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