Editorial

Published: Mar 31, 2022
Updated: Mar 31, 2022

HDFCs Merge To Beget Behemoth

The HDFC management led by veteran Deepak Parekh has sprung a pleasant surprise by announcing the merger of HDFC Ltd, the numero housing finance company in the country, with HDFC Bank, the largest private sector bank in the country. The merger will create a giant bank more than double in size of ICICI Bank, the second largest private sector bank in the country.

This is truly a merger of two giants who are equals and it is a win-win situation for shareholders of both companies. The merger has given birth to a behemoth, 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. There will be enormous synergies between the two entities, including but not limited to reduction in costs of funding, and cross-selling opportunities which will increase the future earning potential of the combined entity. It will also strengthen the balance sheets of both the companies, which will boost shareholder value in the long term.

The merger of HDFC and HDFC Bank is anticipated to build India’s third largest company by capitalization. It was a deal waiting to happen for several years and perhaps the low interest rate regime was one of the biggest compelling factors to time it now.

For HDFC Bank, the merger at this juncture is a master stroke. All was not well with the bank as large-scale restructuring of loans has adversely affected the financial health of the bank’s balance sheet. Analysts were on the verge of downgrading the rating of the bank, while a rejuvenated ICICI Bank, after the Chanda Kochchar episode had spoiled its image, was going from strength to strength and it was widely felt that ICICI Bank would dethrone HDFC Bank from the top position among private sector banks.

But the timely merger has not only helped HDFC Bank retain its positon but has also enabled it to strengthen its presence to such an extent that after the merger it will be double the size of ICICI Bank. First of all, shareholders of HDFC will get 42 shares of the bank for 25 shares they hold in the parent company. This ratio places the bank at a premium to HDFC. The bank does not have to pay a premium over the market price for a business run extremely well within the family. The deal structure opens up headroom for international holdings. The merger may also help resolve the technical issue of high FII ownership of HDFC Bank since HDFC’s stake in HDFC Bank is classified as foreign holding and now that portion of foreign holding will be cancelled.

Again, the merger will increase the bank’s product portfolio and ability to cross-sell while there will also be PSL requirements and higher SLR/CRR requirements. The merger will prove to be a game-changer for the bank and its share price is bound to scale higher levels.