UNITING FORCES: UNRAVELING THE POTENTIAL IMPACT OF THE HDFC LTD AND HDFC BANK MERGER

Introduction

The proposed merger between HDFC Ltd and HDFC Bank has been in progress since 2014 when HDFC Ltd started selling a portion of its home loans to HDFC Bank each quarter. On 4th April 2022, the Board of Housing Finance Firm Housing Development Finance Corporation Limited (HDFC Ltd) approved the proposal to merge its subsidiaries and associates with HDFC Bank, signaling a major step towards a more comprehensive merger. This deal aims to create a financial powerhouse with a significant customer base, strength, and scale in the Indian financial sector. The merger process is expected to take 15 to 18 months, with a projected completion date by the end of 2023.

Basic Details of the Merger

The proposed merger between HDFC Ltd and HDFC Bank, two giants in the Indian financial sector, is set to have significant effects on the industry. HDFC Ltd, the country's largest housing finance company, manages assets worth Rs 5.3 trillion and has a market capitalization of Rs 4.45 trillion. On the other hand, HDFC Bank, the leading private bank in India, boasts an impressive market capitalization of Rs 8.35 trillion. By coming together, the merged entity will have a massive combined balance sheet of 18 trillion (18 lakh crore) and a net worth of 3.3 trillion (3.3 lakh crore). Over its 45-year history, HDFC Ltd has played a crucial role in providing or financing around 9 million homes.

Merger Elevates HDFC Bank to Global Market Leadership

The merger of HDFC Ltd and HDFC Bank cements HDFC's position as a robust financial institution in India and positions it as a potential market leader worldwide. HDFC Bank's impressive balance sheet growth, outpacing even India's largest bank SBI, indicates its potential to outshine global counterparts like Morgan Stanley and Royal Bank of Canada.

With the merger, HDFC Bank's total assets and deposits will surge as it incorporates HDFC Ltd's housing loans into its offerings. The addition of HDFC Life, General Insurance, AMC, and Capital Advisers as subsidiaries further enhances the bank's product range. This synergy opens doors for enhanced cross-selling, leading to increased revenue for the bank and its subsidiaries.

Moreover, the merger enables HDFC Bank to target the untapped 93% of its customer base for aggressive housing loan offerings. The bank's customer base will expand significantly with HDFC Ltd customers gaining HDFC Bank accounts.

In summary, the merger not only bolsters HDFC's standing as a financial services provider but also positions HDFC Bank for global leadership. Investors can expect benefits from the bank's increased scale, diversified products, and expanded cross-selling opportunities, propelling HDFC Bank to greater heights on the global financial stage.

Benefits to HDFC Bank and HDFC Ltd

Diversification: One of the primary advantages of the merger is the diversification of the business operations of both HDFC Bank and HDFC Ltd. The merger will enable HDFC Bank to tap into the housing finance sector, while HDFC Ltd will benefit from access to HDFC Bank's extensive banking capabilities and wider distribution network across urban, semi-urban, and rural areas.

Strengthened Position: By adding the dominant position of HDFC Ltd in the housing finance sector to its own strong presence in the financial services industry, HDFC Bank will further strengthen its position in the market. Additionally, the merger will provide HDFC Bank with a solid base in the real estate market, offering secured asset classes with lower risks.

Scale and Efficiency: The merger will create an entity with increased scale and a comprehensive product offering. This will enable the combined entity to drive synergies across revenue opportunities, operating efficiencies, and underwriting processes, ultimately leading to enhanced profitability and shareholder value.

Cost Efficiency Boost: HDFC Ltd and HDFC Bank Merger Impact

While the merger is expected to lead to cost optimization in the long run, it may take approximately 4 to 5 years to fully realize these benefits. Initially, the merged entity may face challenges, particularly in terms of financial performance. The amount of statutory reserves will increase, and integrating the relatively lower-yielding housing finance business with the bank's lending portfolio may impact the bank's overall finances.

Benefits for Shareholders

A premium will be paid to HDFC Ltd. shareholders depending on the bank's market valuation of the holding company. The combined company will have more scalability and less expensive finance, enabling HDFC Bank to grow its mortgage operations. In turn, this will increase the entire balance sheet's resilience and provide more value for both firms' owners.

Impact on Depositors & Borrowers

Depositors with HDFC Ltd will experience changes after the merger, particularly in terms of interest rates. HDFC Bank may offer lower interest rates compared to HDFC Ltd. However, depositors will also benefit from the increased safety provided by the Deposits Insurance and Credit Guarantee Corporation (DIGC) when holding their deposits in the bank.

Existing borrowers who have availed loans from HDFC Ltd will not experience any immediate impact on the terms and conditions of their loans due to the merger. However, after the merger is approved, HDFC Bank may revise the interest rates on home loans. To ensure smooth auto-debit of EMIs, HDFC Bank may require HDFC Ltd customers to update their KYC (Know Your Customer) and NACH (National Automated Clearing House) details.

Potential Inclusion in MSCI Index

The MSCI Index is a key indicator of India's capital market stability, with the financial sector comprising 26.21% of its weightage as of 2021. Foreign investors rely on the MSCI Index to gauge share price stability and volatility, influencing their investment decisions. As India's infrastructure sector shows strong growth potential, the merged entity stands to benefit, potentially securing inclusion in the Indian MSCI Index. This inclusion would attract foreign investment and propel the entity's growth further.

Conclusion

The proposed merger between HDFC Ltd and HDFC Bank holds significant promise for both entities and the overall financial sector. The amalgamated entity will benefit from diversification, scale, and operational efficiencies, creating a formidable financial institution in India. While cost optimization and the realization of synergies may take time, the long-term benefits for shareholders, depositors, and borrowers are expected to be substantial. Moreover, inclusion in the MSCI India Index will attract foreign investments and provide a positive signal to the market about the company's prospects.

However, it is essential to recognize that the future is uncertain, and successful outcomes will depend on how well both entities navigate through the integration process and address challenges that may arise. Prudent management, strategic decision-making, and adaptability will play critical roles in determining the success and outcomes of the potential merger, as well as the performance of the financial sector as a whole.

Overall, the HDFC Ltd and HDFC Bank merger represents a strategic move towards enhancing growth, profitability, and value creation for all stakeholders involved. Investors and stakeholders should approach this potential merger with a long-term perspective, relying on thorough research, analysis, and expert insights to make informed decisions in an ever-changing economic and financial landscape.

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Article Compiled by:-

Mayank Garg

(LegalMantra.net Team)

+91 9582627751

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including newspapers, Journals, Bare Acts, Case Materials , Charted Secretary, RBI etc.