HDFC merges with HDFC Bank. Here is the entire story

It was a merger that had been waiting to be executed for decades now. The announcement is finally here. HDFC Ltd, the housing finance firm, is merging with India's largest private lender HDFC Bank and buying 41% stake in HDFC Bank.

With this merger, HDFC will become a solid financial service conglomerate and one of the largest banks in the world.

This is what it will look like on paper:

2 wholly owned subsidiaries of HDFC's housing finance firm (HDFC Ltd):

• HDFC Investments Limited and
• HDFC Holdings Limited

will merge with a third entity, i.e.

• HDFC Bank Limited;

and become one complete entity,

• a larger HDFC Bank.

Basically, if you have 25 shares of HDFC Ltd, you will get 42 shares of HDFC Bank. 

WHAT WERE THEY INTO PREVIOUSLY

HDFC BANK

HDFC Bank is one of India’s leading private banks and was among the first to receive approval from the Reserve Bank of India (RBI) to set up a private sector bank in 1994. It provides services like retail banking (net banking, phone banking, etc), wholesale banking (working capital financing and cash management for businesses) and treasury services (managing finances of other companies by investing them in equity market, debt market, local currency market and foreign currency markets). 

HDFC LTD

Formed in 1977, HDFC Ltd is the largest player in the housing finance industry, which provides housing finance to customers to ease their home buying process in India and abroad. The company was created with a vision to increase home ownership in India. 

It has grown over the years by employing consistent strategies like increasing their allocated loans every year, maintaining low non-performing assets, and maintaining cost efficiency to reduce cost-to-income ratio.

This has led HDFC Ltd to be perceived as a steady, long-term growth stock, given that their stocks have grown by 80% in the last 5 years (its share price on April 7, 2017 was Rs 1,484; and as on April 4, 2022 is Rs 2,685). 

The stock prices have grown by 10% in the last 1 year

• Rs 2,445 as on April 5, 2021
• Rs 2,685 as on April 4, 2022

WHAT WILL THE MERGER MEAN?

The merger will bring the two powerhouses together under one umbrella entity and allow the company to use their high ranking in both industries to create advantage for themselves and others. 

1. This will allow the HDFC Group to build a highly competitive housing loan portfolio under the banking platform. At the moment, HDFC Bank sells the home loans of HDFC Ltd and earns a fee. The proposed transaction shall enable HDFC Bank to build its housing loan portfolio and enhance its existing customer base.

2. HDFC Bank has a base of more than 6.8 crore customers, and a common banking platform will provide a diverse low-cost funding base especially to current and savings accounts or CASA. They will also be able to offer more competitive housing products as companies can now merge and create synergies. 

3. Businesses grow with cross-selling their products from the entire range of banking products. HDFC Ltd has 445 dedicated offices of service centres and a trained staff to sell home loans, which will be a great factor for the merged entity. The mortgage business can gain from low cost funds of the bank, while the bank can gain with the premium competence in mortgage lending. 

4. HDFC is the country's second largest bank and the merger will only reduce the gap between the country's first and second largest bank's balance sheets. Post merger, the HDFC balance sheet will stand at Rs 25.61 lakh crore, next to that of the State Bank of India, which stands at Rs 45.34 lakh crore. ICICI Bank has a balance sheet size of Rs 17.74 lakh crore as of March 31, 2021.

5. The large size of the bank will make it a large financial lender, which will allow HDFC Bank to underwrite larger infrastructure projects and increase the quantum of credit to the priority sector. By global standards, the bank can receive more foreign investment because of its large size.

WHO GETS WHAT IN THE MERGER?

• As part of the deal, shareholders of HDFC Ltd will receive 42 shares of HDFC Bank for every 25 shares held.
• Shareholders of HDFC Bank who hold 25 shares with a facevalue of Rs 1, will receive shares of HDFC Ltd having a face value of Rs 2 per share.
• The merger will be conducted by a share swap and once effective, HDFC Bank will be 100% owned by public shareholders.
• Meanwhile, existing shareholders of HDFC Ltd will own 41% of the HDFC bank.

The merger is expected to be completed by the second or third quarter of the fiscal year 2024. The subsidiaries and associates of HDFC Ltd will shift to HDFC Bank.

HOW WAS THE NEWS RECIEVED?

In my 36 years of investing journey, never seen HDFC Ltd rise by 15% and HDFC Bank by 14% in one single session and that too on the same day.phew !!

— Arvind Datta (@datta_arvind) April 4, 2022

Remember the ILFS crisis in 2018 that shook the confidence of the customers and literally made Indians question if putting money in banks was worth it? Well, in line with the ILFS crisis and to prevent such events from shaking customer confidence, the RBI had shared a proposal and asked large NBFCs to convert into banks. This would absorb any impacts of events like such scams and help bring money in the economy. 

As two giants merged, investors went bullish and share price increased drastically on April 4, 2022. HDFC Bank's share price jumped atleast 10%, while Housing Development Finance Corporation Ltd or HDFC Ltd share price soared 13%.

Are you one of the lucky shareholders?