The Indian financial sector is abuzz since two titans, HDFC Ltd and HDFC Bank, announce their merger. It signalled a significant shift in the country’s banking landscape. The merger promises to create an even more formidable banking and financial services entity. It takes advantage of regulatory changes and strategic advantages to foster growth. As of July 1st, 2023, the merger has become effective at an organisational level, with July 12th slated as the last date for trading HDFC Ltd shares.
The Indian regulatory regime has been slightly difficult for standalone Non-Banking Financial Companies (NBFCs). Recent regulatory tightening by the Reserve Bank of India (RBI) has compounded the challenges faced by leading NBFCs. This has pushed the NBFCs towards a merger with their larger banking counterparts. In this context, the merger between HDFC Ltd and HDFC Bank appears a pragmatic decision.
The gradual harmonisation of banking and NBFC regulations has simplified the merger process. The merger provides an opportunity for HDFC Bank to leverage combined resources for faster and sustainable growth.
As an NBFC, HDFC Ltd has historically faced a higher cost of capital compared to a bank. But the merger with HDFC Bank will grant HDFC Ltd access to HDFC Bank’s low-cost deposits, thanks to the latter’s impressive CASA ratio of over 47.1%.
On the other hand, HDFC Bank stands to substantially augment its housing loan portfolio through this merger. It will transform its 11% exposure to mortgages to an impressive 33% post-merger.
The merger incorporates HDFC’s two wholly-owned subsidiaries, HDFC Holdings and HDFC Investments, into HDFC Bank. Consequently, HDFC Bank will gain ownership of all HDFC Ltd’s subsidiaries and associate companies.
Analysts predict HDFC Bank will become India’s second-largest bank in terms of credit, after the State Bank of India (SBI). The merged entity’s balance sheet will exceed an estimated Rs 18 lakh crore. It will also potentially generate profits close to Rs 50,000 crore.
Following the merger’s completion, HDFC Bank will be entirely publicly owned. HDFC Ltd shareholders will hold a 41% stake in HDFC Bank. HDFC Ltd’s shareholders will get 42 shares of HDFC Bank for every 25 shares of HDFC.
The increased size and scale of the newly merged entity will potentially lead to higher earnings and dividends. Therefore, this is good news for the shareholders of both companies.
The merger raises questions on whether other major NBFCs will follow a similar pattern of mergers and acquisitions. One can wonder how the competition in the Indian financial sector will change if more such major mergers and acquisitions start taking place. How will this event affect large cap and small cap stocks in the financial sector also needs to be seen.
This merger marks an important milestone in the Indian financial sector. HDFC Bank is now poised for a new era of growth and dominance.
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Published on: Jul 10, 2023, 10:23 PM IST
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