ADVERTISEMENT

HDFC Bank, HDFC Set To Merge

HDFC Bank Ltd. and Housing Development Finance Corp. and are set to merge in a deal which has been long speculated upon.

<div class="paragraphs"><p>The management of HDFC Bank and HDFC Ltd at a press conference announcing the merger.</p></div>
The management of HDFC Bank and HDFC Ltd at a press conference announcing the merger.

HDFC Bank Ltd. and Housing Development Finance Corp. and are set to merge in a deal which has been long speculated upon. The deal comes at a time when regulations for banks and mortgage financiers have slowly been harmonised, making it less lucrative for the two businesses to be housed in separate entities.

According to an exchange release, the merger will be a two-step process:

  • Step 1: HDFC Investments Ltd. and HDFC Holdings Ltd., wholly owned subsidiaries of HDFC Ltd., will be merged with and into HDFC.

  • Step 2: HDFC will be merged with and into HDFC Bank.

The swap ratio agreed upon is:

  • For every 25 shares of HDFC with face value of Rs 2 each, investors to get 42 shares of HDFC Bank with face value of Re 1 each.

The deal is likely to take 14-18 months to conclude.

The management of HDFC Bank will continue to run the combined entity and Sashidhar Jagdishan will remain the chief executive. Keki Mistry, who is currently vice chairman of HDFC, will stay in his role until the merger is complete. When asked whether Mistry would play a role in the combined entity, he said that he would be close to retirement age by the time the amalgamation is complete. Deepak Parekh, chairman of HDFC, will not be on the board of the merged entity due to his age. The RBI restricts the age for bank directors at 75.

HDFC currently owns about 21% of the bank. The shares held by HDFC in HDFC Bank will be extinguished post the amalgamation. This, according to Mistry, will make the merger accretive on an earnings per share basis from year-one.

The entity will have a foreign shareholding of 65%.

HDFC Bank, HDFC Set To Merge
Opinion
HDFC Bank-HDFC Ltd Merger: Analysts React

The Entities Being Merged

The entities being merged and their assets are as follows:

  • HDFC with total assets of Rs 6.23 lakh crore, turnover of Rs 35,681 crore and net worth of Rs 1.15 lakh crore as on Dec. 31, 2021.

  • HDFC Bank with total assets Rs 19.4 lakh crore, turnover of Rs 1.16 lakh crore (includes other income) and net worth of Rs 2.23 lakh crore, as on Dec. 31, 2021.

  • HDFC Investments has total assets of Rs 341.4 crore, turnover Rs 200.11 crore and net worth of Rs 292.4 crore as on Dec. 31, 2021.

  • HDFC Holdings has total assets of Rs 244.4 crore turnover Rs 20.9 crore and net worth of Rs 241.8 crore as on Dec. 31, 2021.

<div class="paragraphs"><p>HDFC Bank, HDFC Investor Presentation</p></div>
Opinion
HDFC Bank-HDFC Merger: What The Combined Entity Will Look Like

Meeting Regulatory Requirements

According to Mistry, the timing was right for the merger given that regulations for banks and housing finance companies have been harmonised to a large extent. However, the combined entity would still need to meet the cash reserve ratio, statutory liquidity ratio and priority sector lending norms that apply to banks.

Mistry said that a request has been made to the regulator to allow the combined entity to meet regulatory requirements in a phased manner.

The companies have requested for a 2-3 year time period to meet the regulatory ratio requirements on its existing book, the management said.

Even if the regulator does not provide this dispensation, the entities will be in a position to meet the requirements.

The bank has been carrying significant amounts of liquidity, said Jagdishan, when questioned about the amount of funds that would need to be raised to meet those requirements. He added that the bank would be able to raise any additional resources required by the time the merger is concluded.

Opinion
HDFC Bank-HDFC Merger Live: Managements Address Press Conference

Merger Of Equals: Deepak Parekh

This is a merger of equals, said Deepak Parekh, chairman of HDFC. "Over the last few years, various regulations for banks and NBFCs have been harmonised, thereby enabling the potential merger," he said.

The resulting larger balance sheet would allow underwriting of large-ticket infrastructure loans, accelerate the pace of credit growth in the economy, boost affordable housing and increase the quantum of credit to the priority sector, including credit to the agriculture sector.
Deepak Parekh, Chairman, HDFC Ltd.

Explaining the rationale behind the merger, Jagdishan said a number of factors played a role.

  • Interest rates has come down dramatically from a range of 6-7% to 3-4%. As such, SLR and CRR requirements are no more a drag.

  • The bank believes that there are options to meet the additional priority sector requirements which will arise given the large balance sheet that HDFC Ltd has. The bank has made significant headway in lending to micro enterprises. In addition, affordable housing loans will also contribute to this segment of loans.

  • Mortgages are just 11% of the bank's loan book compared to 30-40% for peer banks. When regulatory approvals come in, this product across all branches and touch points.

The merger will be a "seamless dovetailing", Jagdishan said. "It will be a lift and drop."

Opinion
HDFC Bank-HDFC Merger: Cost Of Funds To Fall, Cross-Selling Ability To Go Up, Says Keki Mistry
Opinion
HDFC Bank-HDFC Merger: 'Elephants Can Dance As Well,' Says CEO Sashidhar Jagdishan
Opinion
HDFC Bank-HDFC Merger: Deepak Parekh Says HDFC Has Found A Home For Itself
Opinion
HDFC Bank-HDFC Merger: There's No Time Like The Present
Opinion
HDFC Bank-HDFC Merger: Deepak Parekh Won't Be On Merged Company Board
Opinion
HDFC Bank Posts Higher Loan Growth Across Segments In Q4: Analysts' Take