HDFC Bank, the country’s largest private lender, is set to merge with HDFC Ltd (Housing Development Finance Corporation Ltd), to create a financial services conglomerate, the companies announced on Monday. The proposed merger would enable HDFC Bank to build its housing loan portfolio and enhance its existing customer base. The merger is scheduled to be completed by second or third quarter of FY24.
In a statement, the companies said their boards believe the merger would create long-term value for all stakeholders. The combined entity would also provide an impetus to the government’s vision of “Housing for All.”
“The proposed transaction would create meaningful value for various stakeholders including respective shareholders, customers (and) 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 stated in an exchange filing.
After the merger, HDFC Bank will be 100 per cent owned by public shareholders, while existing shareholders of HDFC will own 41 per cent of HDFC Bank. The subsidiaries and associates of HDFC will shift to HDFC Bank.
Post the merger, there will be a combined customer base of HDFC Bank and HDFC and they will be offered a number of financial products—savings accounts, mortgages or home loans, life insurance, general insurance, health insurance, credit cards, investment products and personal loans. “The merger will benefit both the entities. It would create the required scale and synergies, and bring back lustre to the group stocks. However, profitability of the merged entity may take a hit as the borrowing cost for HDFC will increase while book yield comes down. While there will definitely be cost synergies through the merger, it might take time for the market share to increase. The management would still have to prove the benefits of the merger through operating performance,” says a banking analyst on condition of anonymity.
Here are five things to know about the merger:
Housing Loan Products: The proposed merger will enable HDFC Bank to offer more competitive housing loans. Moreover, HDFC is a significant player in home loans to middle income and low income groups under the affordable housing initiatives of the government. For such categories, access to housing finance would be improved further due to the low-cost funds available to HDFC Bank.
Competitive Housing Products: HDFC Bank has a large base of over 68 million customers. With the merger, the bank platform will be able to provide a diversified low-cost funding base, especially through its current and savings accounts (CASA) base. Hence, the bank will be able to offer more competitive housing products to customers.
Large Balance Sheet: The propose merger would increase the balance sheet size of the combined entity, which would further enable it to underwrite large-ticket loans, “including infrastructure loans,” adds a banking analyst who did not wish to be named. This would also enable a greater flow of credit into the Indian economy.
Cross-Selling Opportunity: HDFC has around 445 offices or service centres across the country. These offices could now be used to cross-sell the entire portfolio of banking products.
Reduction In Unsecured Loans: The proposed merger will reduce the bank’s exposure to unsecured loans. The bank was growing its credit card and personal loans in an aggressive manner as these segments offer higher yield.
