HDFC bank to create third most valuable company in the country

 HDFC to merge with HDFC bank to create third most valuable company in the country

What is the news :

• HDFC Limited will merge with HDFC Bank, creating a banking behemoth.
• The merger is set to make the company the third most valuable in the country.
• HDFC will acquire a 41 percent stake in HDFC Bank through the transformational merger.
• HDFC Limited Chairman Deepak Parekh has described it as a merger of equals. He said mergers will enhance diversity of assets of the combined entity. Mr. Parekh said, this merger will help expand the customer base and build a product portfolio in the housing loan category.

Key things about merger:

• The merger of HDFC into HDFC Bank is likely to create the third-largest entity in India in terms of market capitalisation.
• In an exchange filing, HDFC announced that the company will merge itself with HDFC Bank following a union of subsidiaries HDFC Holdings and HDFC Investments. A similar announcement was made by HDFC Bank in a separate exchange filing.

• The proposed transaction would create meaningful value for various stakeholders including respective shareholders, customers, employees, as the combined business would benefit from increased scale, comprehensive product offering, balance sheet resiliency, and the ability to drive synergies across revenue opportunities.
• HDFC said that its shareholders will get 42 shares of HDFC Bank for every 25 shares of the non-banking lender held by them.
• Based on the market capitalisation of HDFC and HDFC Bank as of April 1, the market value of the merged entity will be close to Rs 12.8 lakh crore. HDFC said that it will hold a 41 percent stake in the merged entity.
• HDFC Bank soared nearly 9 percent while HDFC jumped close to 10 percent following the announcement.
• “This is a merger of equals. Over the last few years, various regulations for banks and NBFCs have been harmonised, thereby enabling the potential merger,” Deepak Parekh, chairman of HDFC said in a press statement.
• Analysts suggested that the merger will create the biggest stock in terms of weight in the Nifty50 index, easily surpassing Reliance Industries’ current weight of 11.9 percent. As of March 31, HDFC Bank’s weight on the index was 8.4 percent while that of HDFC was 5.66 percent.
• Analysts said that the merger benefits parent HDFC given the rise in costs of funds for non-banking entities in India as compared to lenders. With interest rates expected to rise going ahead, the merger reduces the cost of funding for HDFC.
• Some market participants suggested that the move has been forced by the weak stock performance of HDFC and HDFC Bank over the past 18 months even as the wider equity market surged in the COVID bull run.
• Prior to the merger, HDFC’s shares were languishing near its 52-week low while HDFC Bank’s stock has risen merely 4 percent in the past year.
• At 9:37, shares of HDFCwere up 10.75 percent at Rs 2,716 on the National Stock Exchange, while those of HDFC Bank were higher by 9 percent at Rs 1,641.

What  does this merger mean?

• The proposed merger result in reducing HDFC Bank’s proportion of exposure to unsecured loans and also in bolstering the capital base.
• “HDFC and HDFC Bank merger will be beneficial for both the companies. With this, HDFC will merge into HDFC Bank and the shareholders of HDFC Bank will become 100% shareholders of HDFC. The two firms intend to combine their capabilities with the merger, combining HDFC’s domain competence in housing finance with HDFC Bank’s better scale and distribution. This will improve the amalgamated entity’s ability to cross-sell banking and housing finance products. We have seen a positive impact on the stock prices and we believe that it will help both companies to increase their profitability as they would be able to use each other’s strength to there advantage,” said Animesh Malviya, Banking Analyst at CapitalVia Global Research.

How does HDFC gain?

• For HDFC, the biggest gain will be access to well-diversified low-cost funding and a huge customer base of HDFC Bank Ltd, explained Santosh Meena, Head of Research, Swastika Investmart.
• “Earlier non-banking financial corporations used to enjoy regulatory arbitrage vis-à-vis banks, but the regulatory authorities have harmonized the same, thus making this merger necessary and creating a competitive advantage over its peers,” he said.

How does HDFC Bank gain?

• The proposed merger will enable HDFC Bank to build its housing loan portfolio. The housing loan market is at the cusp of a strong up-cycle along with tailwinds for the real estate sector, and it provides a steady secured asset class with very attractive risk-adjusted returns. This will increase the balance sheet size of the merged entity enabling it to underwrite large ticket size loans.
• Overall this is a marriage made in heaven, creating increased scale, comprehensive product offering, balance sheet resiliency and the ability to drive synergies across revenue opportunities, operating efficiencies and underwriting efficiencies, hence benefiting stakeholders of both the companies

 Why the sector is set for consolidation:

• “Private sector banks in India need scale to cater to the latent demand for credit in the economy, in the coming decade. Therefore the sector is set for consolidation. In some cases it maybe the merger of banks with NBFCs having complimentary credit profile. The merger of HDFC and HDFC Bank was long expected as it gives the entities access to cheaper funds and franchise respectively. The merger can be a win-win for shareholders of both entities in the long term. It will especially help the merged entity counter competition,” said Tanushree Banerjee, Co-Head of Research at Equitymaster.

 How do the shareholders gain?

• Shareholders will also have an advantage as the share prices will increase and the companies will be more profitable. Existing shareholders of HDFC will get shares in HDFC Bank – every 25 shares held in HDFC will fetch 42 shares in HDFC Bank.
• ” The merger will provide the combined entity more efficiencies of scale and will bring down costs, thereby benefiting shareholders of both entities,” said Rishad Manekia, Founder, Kairos Capital
• There will be enormous synergies between the two entities including but not limited to reduction in cost of funding, cross selling opportunities, etc. which will increase the future earning potential of the combined entity. It will also strengthen the balance sheet of both the companies put together, that will boost the Shareholders’ value in long run. In this proposed merger, the subsidiaries of HDFC Limited will also get shifted to HDFC Bank, which is again a plus and will unlock the value for the shareholders in future.

About HDFC ltd:

• Housing Development Finance Corporation Limited(HDFC) is an Indian financial services company based in Mumbai.
• It is a major housing finance provider in India.
• Chairman – Dipak Parekh

About HDFC bank:

• Chairman -Atanu Chakraborty
• CEO -Sashidhar Jagdishan
• Founded – 1994 August
• Headquarter – Mumbai.