HDFC Merger / Merger of HDFC Bank - What will be the benefits to the country and the common people, how will it affect the financial sector?

HDFC Merger: The Board of Directors of Housing Development Finance Corp Limited ie HDFC and HDFC Bank on Friday approved the merger between the two institutions with effect from 1 July. After which HDFC will become the fourth largest bank in the world after JP Morgan, ICBC and Bank of America in terms of market cap. At present, the joint market cap of HDFC and HDFC Bank is Rs 14.73 lakh crore. All HDFC shares and warrant holders till July 13 will be eligible for HDFC Bank shares.

The date for transfer of HDFC's Non-Convertible Debentures (NCDs) in the name of HDFC Bank has been fixed as July 12. While the commercial letters of HDFC will be transferred to HDFC Bank from July 7. The special thing is that on July 13, HDFC Bank will issue 42 new equity shares to those shareholders of HDFC Limited in exchange for every 25 equity shares held. There are many questions in mind regarding this merger. But the biggest question is that after all, what will be the benefit of this merger to the financial sector of the country and what kind of benefits will the common people get. Let us discuss it in detail.

Why was the decision of merger taken?

There are three main reasons for this merger. The first is the current interest rate environment. RBI reduced the CRR and SLR requirement from 27 per cent to 22 per cent and third, there has to be high liquidity in the system. According to a source, apart from these three, another reason was that the leadership in HDFC Ltd was approaching 70, and given the looming question of succession, it was felt that a merger with HDFC Bank would yield better synergy benefits. . Banking sources said the proposal was mooted even when Aditya Puri was the MD of HDFC Bank, but it could not move ahead due to several concerns. Puri resigned on October 26, 2020 after holding the post for 26 years.

Does this merger make sense?

With the regulatory tightening by the RBI for non-banking financial companies, especially with regard to NPA recognition norms, and bringing the rules almost at par with banks, the decision to keep HDFC Ltd. and HDFC Bank separate has been questioned. were standing up Moreover, banks and new-age fintech companies led by SBI have intensified the competition in the home loan segment.

However, business-related synergies could operate without a merger. The management claims that the increased size of the unit's balance sheet will enable it to enhance its competitiveness and create shareholder value. HDFC Limited earned a net profit of Rs 16,239 crore in FY2023. HDFC Bank's profit was seen at Rs 44,108 crore.

Will HDFC Bank benefit from the merger?

This merger will be more beneficial for HDFC Limited as its business is less profitable. With this merger, the penetration of the company's products can increase in the market and funding cost is also expected to come down. At the same time, HDFC Bank will get a unique advantage through its mortgage portfolio, which will give it a big jump in distribution in semi-urban and rural areas.

According to the experts, the joint unit will be able to earn profit with adequate coordination, which will be good for all the beneficiaries and shareholders. While the merged entity will see some cost synergies, it is difficult to see how it will help the merged entity to increase its market share. HDFC Bank is in trouble with its digital initiatives, and many parts of its retail banking are under pressure from fintech companies.

HDFC is facing increasing pressure from public sector banks in its mortgage business. An analyst said, the management has all the resources to meet the short term challenges and come out on top. Another advantage of the merger is that the cost of borrowing for HDFC will come down. When this happens, the combined entity will benefit in terms of cost efficiency and enhance value for more shareholders.

How will the shareholders benefit from the merger?

As part of the merger, 42 shares of HDFC Bank will be given for every 25 shares of HDFC Ltd. After the merger, HDFC Bank will be 100 per cent owned by public shareholders, and existing shareholders of HDFC Limited will hold 41 per cent. in bank. The foreign shareholding in the bank is around 8 per cent and it is likely to increase. On June 30, HDFC shares closed at Rs 2821.50, up 1.51 per cent. HDFC Bank closed at Rs 1701.75 on the BSE, up 1.51 per cent.

What will be the impact on the financial sector?

After this merger, the competition between HDFC Bank and SBI is expected to be even more intense. According to ICICI Securities, HDFC Bank aims to double its balance sheet in five years by clocking 15 per cent annual growth. At the same time, HDFC Bank is also planning to double its branches in the coming three years. The bank is planning to replace the technology stack in three to four years. The banking sector is expected to see more strength in the coming months. Axis Bank recently acquired Citibank's retail business in India for Rs 12,325 crore, and the government has put IDBI Bank on the block for privatization.

According to Standard & Poor's rankings, State Bank of India, which retained its top position, saw its assets grow by 2.64 per cent year-on-year to $725.08 billion. Due to its proposed merger with HDFC Limited, HDFC Bank's pro forma assets grew by 57.67 percent to $441.05 billion, making it the second largest bank. ICICI Bank is at the third position with total assets of $238.49 billion.