HDFC Bank, India’s most enormous private banker, will merge with Home Development Financing Corporation, the country’s largest housing finance provider, to form a financial services behemoth, the companies said on Monday.
The board of HDFC and HDFC approved a $40 billion merger of the leading home financing business with its banking arm on Monday, in the largest merger in Indian corporate history.
According to the company, the merger of India’s largest home financing business HDFC, with India’s largest private sector bank HDFC Bank, has been accepted by the board of directors. The transaction will likely help the Bank expand its home loan portfolio and client base. According to the proposed deal, public shareholders own 100% of HDFC Bank, while existing HDFC Limited shareholders will possess 41% of the Bank.
According to the share exchange ratio, stockholders would receive 42 equity shares of the merged business for every 25 equity shares they own. On Monday, HDFC Bank’s stock surged 14% on the benchmark indexes, while its stock rose nearly 16% on the NSE Nifty and BSE Sensex.
The merger will be split into two halves, with HDFC Investments Limited and HDFC Holdings Limited merging with HDFC Limited as the first phase. The combination of HDFC Limited and HDFC Bank will be the next phase in the merger. They have combined assets of more than Rs 25 lakh crore. As of December 31, 2021, HDFC had a revenue of Rs 35,681.74 crore, while the Bank had a turnover of Rs 1.16 lakh crore.
The Company was established in 1977 with the help of India’s business community as India’s first specialized mortgage firm and the flagship of the HDFC group of enterprises.
The Industrial Credit and Investment Corporation of India (ICICI) sponsored HDFC. Hasmukhbhai Parekh was instrumental in establishing this firm, which began with the primary goal of alleviating India’s housing crisis and rapidly grew after that.
HDFC Ltd is the parent organization of HDFC Bank and owns several other financial institutions. (For example, HDFC Life, Red, Securities, etc.) So, financial institutions are involved in the financial sector (for example, those dealing directly with money), including NBFCs (non-banking finance corporations) and banks.
A bank is a business that is authorized to store depositors’ money and pay them interest while also being able to lend it out. Even though a bank is a financial institution, not all financial institutions are permitted to conduct banking transactions. The remainder is non-bank financial firms (NBFCs), including insurance companies, trading companies, and so forth.
To be more specific, HDFC Ltd. is a large corporation with multiple subsidiaries, one of which, HDFC Bank, has a banking license.
What is the merger strategy?
According to the transaction structure, India’s largest housing finance company by assets with Rs 5.26 trillion in AUM and a market capitalization of Rs 4.44 trillion will merge with HDFC Bank, India’s largest private sector bank by assets with a market capitalization of Rs 8.35 trillion.
HDFC Investments and Holdings will merge with the primary mortgage firm in the planned deal. Following that, HDFC and its banking arm will combine, resulting in all group firms becoming direct subsidiaries of HDFC Bank. HDFC is also the holding company for HDFCLife, General Insurance, Mutual Fund, Credila, Venture Capital, and the Bank.
Benefits of the merger of HDFC LTD and HDFC Bank
It is India’s leading home financing provider, with unrivalled contacts, size, and extensive underwriting knowledge in the housing industry spanning decades and economic cycles.
With over 68 million clients, 6,342 locations, and a comprehensive array of credit, liability, and distribution solutions, HDFC Bank is the largest private sector bank with decades of solid connections, insights, and knowledge of its customers.
The united firm will integrate the two companies’ complementing qualities, allowing for a fulfilling client relationship. Customers of HDFC Bank would be given mortgages as a critical product in a smooth way after the merger. It will also take advantage of the long-term mortgage connection to provide a wide range of credit and deposit products based on superior customer insights across the customer life cycle. Due to this, all clients of the merged firm will benefit from an improved value offer and customer experience.
The home loan market is on the verge of a significant upswing, with all-time high favourable industry fundamentals. It offers a solid asset class with highly attractive risk-adjusted returns. Regulatory developments and reforms have created a favourable environment for the two entities to merge, resulting in a “win”, such as:
- Higher regulatory standards for non-banking financial companies (NBFCs), which have narrowed the gap with the banking regulatory framework
- Lower SLR rates
- The creation and deepening of the affordable housing loan market
- The creation and deepening of the Priority Sector Lending (“PSL”) Certificates market,
The board members of the company feel that the merger would benefit all stakeholders, including customers, workers, and shareholders of both companies, in the long run. The merger of the two companies will give the government’s objective of “Housing for All” even more traction.
Company view on this:
Deepak Parekh, the chairman of HDFC, stated that for every 25 HDFC shares held, owners would receive 42 HDFC Bank shares. According to the transaction terms, HDFC’s 26 per cent interest in HDFC Bank would be extinguished. The Bank would be held entirely by public shareholders, with existing HDFC Ltd shareholders owning 41%.
“Change is unavoidable, but it is welcomed when it benefits all parties involved.” “The merger not only strengthens the merged firm to compete, but it also makes the mortgage product more competitive,” Parekh added.
HDFC Bank has overtaken its predecessor in terms of value and asset size over the years. In many respects, the planned merger will improve the economy. According to Parekh, a stronger balance sheet and capital base will allow more credit to flow into the economy.
Edited by Prakriti Arora