Union of HDFC Bank with HDFC Limited: Analysis

The biggest merger in the history of India Inc. mortgage firm HDFC Ltd united with HDFC Bank, creating a banking behemoth with a market capitalization of Rupees 14 lakh crore. After 45 years in the industry, the underwriter of homes for millions of Indians is rolling in with its 28-year-old banker offspring. The joint-family structure makes sense for Housing Development Finance Corp. and HDFC Bank Ltd.

Mortgages to get more competitive as lenders arrive under stress peg interest rates to models not in their authority, such as the central bank’s repo rate. Similarly, since India’s 2018 mini-Lehman moment, controllers have frowned upon too-big-to-fail monoline financiers lacking the key to cheap and assured banking liquidity.

After the merger, HDFC Bank will be 100 percent owned by public shareholders, and existing shareholders of HDFC Ltd will hold 41 percent of HDFC Bank. Shareholders of HDFC Ltd will receive 42 shares of HDFC Bank for 25 shares of HDFC Ltd of Rs 2 each, a ratio of 1:1.68.

Following the statement by HDFC chairman Deepak Parekh, HDFC Bank shares hit up by 9.97 percent to Rs 1,656.45 on the BSE Monday. HDFC Ltd shares rose by 9.30 percent to close at 2,678.90. The combined market capitalization will allow HDFC Bank to overtake TCS and become No. 2 in evaluation after Reliance Industries Ltd (Rs 18.01 lakh crore). There are few unanswered and obvious questions among people regarding the union.  In this article, we have sorted some of the questions and given answers.

How is the HDFC-HDFC Bank union going to benefit its customers?

As of date, HDFC Bank consists of 68 million customers and 6,342 branches. HDFC Bank has said that the merger of India's most extensive Housing Finance firm, HDFC Limited, with HDFC Bank will allow flawless delivery of home loans and power on the large base of over 68 million customers for HDFC Bank and, among other things, enrich the pace of credit growth in the economy.

"Post the blend, HDFC Bank's customers will be presented mortgages as a core product seamlessly. HDFC Bank would also leverage the long tenor mortgage relationship to offer various credits, and deposit products enabled through better insights throughout the customer life-cycle. This would result in an enriched value proposition and customer experience for all customers of the combined entity," stated the bank.

What arises to HDFC Ltd employees after the HDFC-HDFC Bank union?

Shivaji Thapliyal, Lead Analyst, Institutional Equities, YES SECURITIES, said from the Banking standpoint of the HDFC-HDFC Bank merger, stated, "The jobs of HDFC Limited employees will remain protected."

What is the future of HDFC Ltd branches after the HDFC-HDFC Bank union?

Thapliyal added that the HDFC Limited branches would be retained, but they could be converted to full-service bank branches at some point in the future.

Deepak Parekh, Chairman of HDFC Limited, stated, "This is a merger of equals. We consider that the housing finance business is poised to develop in leaps and bounds because of the implementation of RERA, the infrastructure status of the housing segment, and government initiatives such as affordable housing for all, among others. Over the last few years, many regulations for banks and NBFCs have been harmonized, thereby allowing the promising merger. Further, the resulting larger balance sheet would permit underwriting of large ticket infrastructure loans, accelerate the pace of credit growth in the economy, enhance affordable housing and raise the quantum of credit to the significance sector, including credit to the agriculture segment."

What is the effect of HDFC’s merger on Indian financial services sector?

Harsh Goenka, Chairman, RPG Enterprises, says Imagine Rohit & Kohli rolled into one or Akshay Kumar & Ranvir Singh or US & Russia. The result is clear- domination! With this merger, the Indian financial scene is ready to explode with the creation of one of the largest and finest global financial institutions!

This comes at a time when India’s biggest mortgage lender agreed to buy one of the country’s most valuable banks to create an almost $190-billion behemoth to ride a boom in home loans and consumer spending in the world’s fastest-growing major economy.

The Housing Development Finance Corp., which gives mortgages to more than half the home shoppers in the country of 1.4 billion people, will grab 41% of HDFC Bank Ltd., a bank it helped found 28 years ago. As per the report, shares of the two Mumbai-based companies surged on the announcement, among one of the most significant M & M&A deals this year.

The transaction, which will create one of India’s largest financial services entities, follows a proposal by the banking regulator for large non-banking finance companies to convert into banks to avoid a repetition of the nation’s massive shadow lending crisis in 2018. India’s emergence from the pandemic and the improved labor market has helped boost consumer demand and improve lenders’ retail portfolios.

Experts say M&As in NBFC sector likely to rise

The RBI’s regulatory actions increase the accountability bar for NBFCs and cut them less sloppy than they used to have.

“The harmonization of some of the key regulatory needs of NBFCs with that of banks has reduced the leeway which was open to NBFCs in the past. This, along with other aspects including enhanced synergies, outcome or geographical diversification, sounder shareholder value, permit to liquidity or lower cost of funds are the fundamental bases for the large merger proposals which are in the news over the recent past,” said A.M. Kartik, vice-president and sector head of financial sector ratings at ICRA.

Kartik says that the issue of small and mid-sized NBFCs is more about viability, future growth plans, and access to funding resulting in mergers with relatively larger NBFCs. He said that access to financing for NBFCs would be a key differentiator in the future, as the sector is highly dependent on the banking sector at present.

Jinay Gala, associate director at India Ratings & Research, expresses the HDFC and HDFC Bank merger will likely be a test case for all upcoming large-ticket mergers in the NBFC sector.

While there is a chance of small NBFCs merging with bigger ones to gain scale and associated benefits, NBFCs may also look at buying fintechs to upgrade and scale their current technology infrastructure.

“We predict that there could be an increase in coalition in the non-bank sector to avail advantages of a larger franchise, larger product basket, and a larger reach so that they could stay competitive to other lenders like banks and small finance banks,” Gala said.