The merger of HDFC Ltd. and HDFC Bank

The story so far: The mortgage bank HDFC Ltd. and India’s largest private bank HDFC Bank announced a mega-merger on Monday.

The merger creates a financial giant that should better tap into the increasing demand for credit.

Under the terms of the deal, which is one of the largest in the Indian financial sector, HDFC Bank will be 100% owned by public shareholders, while existing shareholders of HDFC Ltd. 41% stake in HDFC Bank.

What are the terms of the merger?

The two companies announced that their respective boards of directors have approved the merger. The merger must then go through a series of regulatory approvals.

It must also obtain approval from the shareholders of both companies. At that moment, the two companies have announced that this is an all-share deal, meaning no cash transaction is involved.

The terms of the share exchange are such that the shareholders of HDFC Ltd. 42 shares in HDFC Bank for every 25 shares they hold in HDFC Ltd.

After the merger, HDFC Ltd. no longer be a separate mortgage lender, but integrated into the bank. The bank, which is a descendant of HDFC Ltd. and the older legacy entity is the one acquiring the mortgage lender. With the acquisition of the mortgage lender, it also acquires all of its subsidiaries, including a general insurance company, a life insurance company, and an asset management company.

What happens to existing customers and employees?

On the customer side, the customers of HDFC Ltd. also customers of the bank. As far as employees are concerned, HDFC Bank plans to take on and retain all employees.

Neither company is very employee-intensive and have been fairly conservative in terms of headcount.

At the press conference announcing the merger, HDFC Chairman Deepak Parekh specifically said that the employees of HDFC Ltd. become part of the bank.

Is it worth going through this exercise that will take about 18 months to bear fruit? What is the rationale for this?

Any merger involving two companies takes time. However, since these two entities belong to the same house or group, this will not pose too much of a challenge for them. As both HDFC Ltd. and HDFC Bank largely have a fairly conservative lending culture, both reasonably customer-friendly, customer-centric and cultural, that wouldn’t be much of a challenge. Integration would just be about making sure everything works seamlessly and smoothly, mapping the books to each other, merging the IT systems and so on.

Regarding the reasons for the merger, Mr. Parekh said a few things, one of which was that the development of the regulatory framework for the NBFC industry (non-bank financial companies) has gradually come closer in recent years. to harmonize with the regulatory framework of the banking sector. Previously, NBFCs had a rather different and far more relaxed lending and deposit framework. This caused problems in the industry as some NBFCs struggled and went under or were taken over by others. The Reserve Bank of India has tightened regulatory structures for the NBFC industry over the years. Mr. Parekh clarified that the regulatory environment has been harmonized as much as is reasonable and RBI should also be satisfied. If you have a large NBFC the size of HDFC Ltd. it makes more sense to merge them with a bank since banks are much more tightly regulated and oversee the RBI much more.

As the Basel III capital adequacy standards apply, the NPA (Non-Performing Asset) book is monitored very closely. Even from a regulatory standpoint, RBI likely won’t be dissatisfied if this merger goes through as it wants NBFCs to be tightly regulated. And when you’re part of a bank, you’re better regulated.

What did HDFC Ltd. and HDFC Bank of it?

After the merger, the mortgage lender HDFC Ltd. Access to HDFC Bank’s CASA deposits (checking and savings accounts), which are lower-cost funds. For the mortgage lending business, the cost of capital will fall. If the cost of capital falls, it will automatically have the opportunity to lend at a cheaper rate. For the HDFC Bank, every building society customer can be developed into a bank customer.

Was there pressure or an immediate need for the merger?

Competition in home finance has increased, say since 30 years ago when HDFC Ltd. was one of the few housing finance companies. Now the companies that issue loans for housing have increased significantly. The larger ones are LIC Housing Finance, PNB Housing, Bank of Baroda Housing etc. SBI also has a housing company. Banks have also lent through subsidiaries – Canfin Homes is the home finance subsidiary of Canara Bank. So in a way it makes sense for HDFC that HDFC Ltd. and HDFC Bank are under one roof because from a banking perspective, when you lend, it’s easier to lower your funding costs as your balance sheet size grows. When you raise capital, your cost of capital also goes down.

For HDFC Bank, it’s about gaining access to a large customer base for cross-selling purposes. For the HDFC Ltd. and the mortgage lending business is primarily about lower capital costs.

Does a bigger balance sheet on the NPA situation help?

For HDFC Bank, non-performing loans are not a major pressure point as it has been a conservative lender compared to its competitors. They have always shied away from lending large amounts to companies. Most of their lending is to private borrowers. What HDFC Ltd. As far as I’m concerned, there may have been some pressure on home loans during the pandemic, but from what they have disclosed so far it’s not a major pressure point either. In addition, the merger with the bank is helping to alleviate the emerging pressure.

Will lending behavior change?

Infrastructure lending is a serious problem in India. With the government making it clear that the infrastructure segment needs funding, we’ll have to wait and see whether the merged company has the expertise to fund infrastructure projects, which is a risky proposition. They have a large volume of resources, and if they see concrete opportunities in good entrepreneurs and good government projects, they can go for them.

What impact will this deal have?

It is possible that other NBFCs will seek mergers with banks. There is already talk of the number of banks collapsing. In a way, the merger of HDFC Bank with HDFC Ltd. be a precursor to what will happen in the state-run banking space, where the government has announced plans to reduce the number of public sector banks.