The Great Merger of HDFC Twins
Introduction
In the recent past two years, the mergers
or acquisitions that had taken place were generally because either the
companies were not performing well or were in debt and unable to repay.
As what started as a mortgage company has
now a combined valuation of more than 14 lakh crore Rupees. So what's actually
the rationale behind this move and how will it take place?
Rationale behind merger
The main reason for the
merger is that the strength of the combined balance sheet is going to be so
massive that it will provide great benefits to the economy.
HDFC, as a housing finance
company, has a higher cost of funds than banks, and when it will move into a
banking structure, the total cost of funds of HDFC itself will come down,
resulting in the availability of money at a cheaper rate to fund the mortgage
business. So with the help of this merger, HDFC will have the benefit of
distribution in the 6,500 branches of HDFC bank.
How it will work
The merger will be a
two-step process where firstly, HDFC Investments Ltd and HDFC Holdings Ltd,
which are wholly-owned subsidiaries of HDFC, will be merged with and into HDFC.
And, then later on, HDFC will be merged with HDFC Bank. HDFC and its two
subsidiaries currently hold 21% of the share capital of HDFC Bank, and HDFC
shares will be extinguished after the merger. Given, the complexity involved,
this process could take 14–18 months, and the deal is likely to be completed by
the end of FY24.
The share exchange ratio for
the amalgamation of the corporation with and into HDFC Bank will be 42 equity
shares of the face value of Re 1 each of HDFC Bank for every 25 fully paid-up
equity shares of the face value of Rs 2 each of the corporation. Therefore, the
swap ratio works to be 1:1.68.
Post the merger, HDFC Bank
will be 100% owned by public shareholders along with existing shareholders of
HDFC Limited who will own 41% of HDFC Bank.
Opportunities and threats to the merger
|
Opportunities
|
Threats |
|
1. They would now have the opportunity to
cross-sell products as a result of the merger, which would create a plethora
of options for customers. |
1. Larger banks like HDFC
might be more vulnerable to global economic crises while smaller ones can
survive. |
|
2. It helps to improve the
professional standard. |
2. Coping with the
disappointment of employees for the governing board of the new bank would
become a difficult task. |
|
3. The total cost of funds
of the entity will come down, which means money will be available at a lower
rate to fund the mortgage business. |
3. The worst part about
bank mergers is how the culture at a bank can get shifted, thus confusing the
stakeholders regarding its working. |
Financial Analysis of HDFC Bank vs SBI vs
ICICI Bank
The amount shown in the pie chart is given in Crores (INR) [source: Finology]
At
current, the HDFC and ICICI are the competitive ones in the banking sector, and
when it comes to profit margin, the HDFC is already exceeding not only the
ICICI but SBI as well. And if the RBI approves the merger subsequently, the
HDFC certainly will outclass the ICICI and will be the second one in the
leading ones giving competition to the SBI.
[source: Finology]
Future of this Mega-merger
It is expected that this
mega-merger will create value for all its stakeholders as the product and
market leadership of HDFC Limited in the housing finance business and the
distribution and customer leadership of HDFC Bank will enable the combined
entity to offer a complete suite of financial products to Indians at large. The
merger makes this combined entity strong enough to not only counter competition
but also make the mortgage offering even more competitive. RBI’s approval will
be a key monitorable of whether this merger will happen or not due to its new
rules and regulations in recent years.
Post the merger, India
probably will have 2 banks on the global list of top 100 banks with HDFC at
72nd rank and SBI already being the 45th. Hence, the lead taken by HDFC bank
can be a great trendsetter for banks to turn into larger entities of
significance.
Let us know in the comment section your views regarding this strategic move which might result in the creation of the new banking "Bahubali".
References:
- https://www.hdfc.com/investor-relations#annual-reports
- https://www.hdfcbank.com/personal/about-us/investor-relations/annual-reports
- https://www.icicibank.com/aboutus/Annual-Reports/2020-21/AR/balancesheet.html
- HDFC Bank Share Price, Financials and Stock Analysis (finology.in)
- https://groww.in/blog/hdfc-bank-merger-with-hdfc-ltd
- https://bit.ly/3rQURxX
- https://www.oneindia.com/india/bank-merger-in-india-what-are-the-pros-andcons-2780214.html
- https://bit.ly/3k9X4jV
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