India’s biggest-ever merger—HDFC with HDFC Bank—has triggered a churn in the country’s financial sector.
On April 4, the board of the housing finance firm Housing Development Finance Corporation (HDFC) approved the merger of its wholly-owned subsidiaries HDFC Investments and HDFC Holdings with the private lender, HDFC Bank.
HDFC Bank was launched in 1994 as a subsidiary of HDFC. The housing finance firm itself was incorporated in 1944 and has been one of India’s foremost private mortgage financiers. HDFC Bank, on the other hand, too, has grown into one of the country’s largest private banks, with 6.23 lakh crore rupees ($82.4 billion) assets under management at the end of December 2021.
Their combined market value now will come to Rs14.2 lakh crore, becoming India’s second-largest company after Reliance Industries (Rs18.01 lakh crore).
While Sashidhar Jagdishan, managing director and CEO of HDFC Bank, will continue to lead the merged entity, it is not clear what role Keki Mistry, vice-chairman and CEO of HDFC, will play post-merger.
“As far as Mistry is concerned, he is 67 years old. So, he may have a year or year and a half to be a director on the board of the bank. He will not be a full-time executive and he does not want to be a full-time executive, not that we don’t want him,” Deepak Parekh, HDFC chairman, said during a press meet.
The Reserve Bank of India (RBI) bars people aged beyond 75 years to be on the board of a bank.
The entire process of regulatory approvals for the merger will unfold over the next 12-18 months and is likely to conclude by the fiscal year ending March 2024. The issues, ranging from compulsory reserve requirements, management structure, governance regulations, and technology spending, among others, still need to be discussed.
The merger is aimed at adjusting to the changing landscape, especially the digital one, of India’s banking sector amid competition from fintech companies and tech-adept non-banking finance institutions, experts say.
Post-merger, HDFC will no longer be HDFC Bank’s parent company. The private lender will be fully owned by public shareholders, according to a filing with the stock exchanges (pdf). Shareholders of the home loan firm will acquire 41% of HDFC Bank.
Overall, the shareholders stand to gain from the merger as the new organisation is likely to earn more profits in the long term due to its large combined balance sheets.
“The merger will provide the combined entity more efficiencies of scale and will bring down costs, thereby benefiting shareholders of both entities,” said Rishad Manekia, founder of Kairos Capital.
However, analysts expect near-term challenges, pertaining to regulatory hurdles.
The RBI, for one, may not approve the extent of insurance operations the bank will take over post-merger. Therefore, changing the company structure into a holding company could be one way, but it would impact the balance sheet of the new company adversely, Reuters reported.
“If a holding company structure is enforced then the equation changes. The cost goes up as stamp duties and taxes will go up,” Macquarie Research said in a note.
HDFC Bank does not offer home loans. This merger with HDFC, hence, will help it cross-sell products to a larger customer base. It is expected to result in significant market gains for the private lender, given that HDFC is the issuer of mortgages to over half the home buyers in India, according to S&P Global Ratings.
“The bank’s cost advantage will make the housing loan business much more competitive amid the rising dominance of banks in the segment,” Emkay Global Financial Services said in a report.
Further, HDFC’s loans will get cheaper since the cost of borrowing is relatively lower at commercial banks. This will expand its balance sheet, enabling the new entity to underwrite big-ticket loans.
“The Indian economy will benefit from larger investment by the merged entity in large infra projects. India will have a large global bank,” said VK Vijayakumar, chief investment strategist at Kochi-based investment services company Geojit Financial Services.