HDFC Bank, HDFC to merge in $40bn deal to create lending behemoth

HDFC Bank, HDFC to merge in $40 bn deal to create lending behemoth
The headquarters of India's HDFC Bank is pictured in Mumbai, India, December 4, 2015. Reuters/Shailesh Andrade

Mumbai: India's most valuable lender HDFC Bank on Monday agreed to take over the country's largest mortgage lender in a $40 billion deal, creating a financial services titan in the largest transaction in the nation's corporate history.

Once the deal is effective, HDFC Bank will be 100 per cent owned by public shareholders, and existing shareholders of HDFC will own 41 per cent of the bank, the two firms said.

Every HDFC shareholder will get 42 shares of HDFC Bank for every 25 shares held.

The proposed entity will have a combined asset base of around Rs 18 lakh crore. The merger is expected to be completed by the second or third quarter of FY24, subject to regulatory approvals.

Making the announcement, HDFC Chairman Deepak Parekh said it is a 'merger of equals', which will also benefit the economy as a larger balance sheet and capital base will allow a greater flow of credit into various sectors.

The transaction involves the amalgamation of HDFC and its two wholly-owned subsidiaries HDFC Holdings and HDFC Investments with HDFC Bank.

"The merger is a coming together of equals. Our customers will be the biggest beneficiaries," Parekh told reporters.

Absorbing HDFC Ltd will help HDFC Bank narrow the gap with bigger rival State Bank of India (SBI) and help it expand its home loan portfolio as well as open up the scope for larger loans by building on its 6.8 crore customer base.

The merger of HDFC Bank and HDFC could create the second largest company in India by market capitalisation, leaving behind TCS, the crown jewel of the Tata group.

The HDFC twins now have a combined m-cap of Rs 13.99 lakh crore, exceeding Rs 13.94 lakh crore of TCS. Reliance Industries remains India's largest company by a huge margin, with its market cap standing at Rs 18 lakh crore.

The merger could improve HDFC Bank's earnings over the next three to five years, said S&P Global Ratings, solidifying its ranking as the second-largest bank in India, twice the size of number three ICICI Bank Ltd.

"HDFC Bank's larger balance sheet could enhance its wholesale lending opportunities," the ratings firm said.

The lender currently is largely retail-focused but the merger will allow it to underwrite larger ticket loans, including those for infrastructure.

Parekh said over the past few years there have been certain regulatory changes for banks and non-banking financial companies (NBFCs) which have considerably reduced the barriers for a potential merger.

"For an NBFC, the arbitrage which was available in the past is getting narrowed now. So, there is very limited advantage for being an NBFC because they are being regulated at par with banking regulations," he said.

He added that the strategic rationale for the proposed merger includes reduction in SLR (statutory liquidity ratio) and CRR (cash reserve ratio) requirement for banks from 27 per cent to 22 per cent and favourable interest rates today compared to the past.

He also said banks have now an option to invest in priority sector lending (PSL) certificates to meet regulatory requirements as against direct lending to agriculture and MSMEs in the past. Besides, with RERA and the Insolvency and Bankruptcy Code (IBC), real estate is witnessing an increased level of transparency.

HDFC Bank has requested the Reserve Bank of India (RBI) for a phased-in approach in respect of SLR/CRR, priority sector lending, grandfathering of certain assets and liabilities and in respect of some subsidiaries, Parekh added.

HDFC Bank chief executive and managing director Sashidhar Jagdishan said the value of the proposed deal is $40 billion.

"The value of HDFC is $60 billion. If you strip off the portion of their (HDFC) holding in us (HDFC Bank), it comes to $40 billion and that's the value of the deal," Jagdishan told reporters.

He said the primary motivation for the merger was to fulfil the latent demand of housing from their customers.

The combined balance sheet will be Rs 17.87 lakh crore and the net worth will be Rs 3.3 lakh crore, as of December 2021 balance sheet.

Speaking on the deal, HDFC vice-chairman and chief executive Keki Mistry said the merger will be EPS (earnings per share) accretive from day one.

The merger will take anywhere between 12 and 18 months, Parekh said.

Post merger, all the subsidiaries and associate companies of HDFC will be owned by HDFC Bank.

Parekh also clarified that the merger will not impact employees of HDFC.

On HDFC Life Insurance Company, Parekh said HDFC owns around 48 per cent stake and would like to increase its holding, if the regulator permits.

"We have written to the RBI and we hope to get a reply sometime sooner for permitting us to keep the stake as it is or they may tell us to buy 1 per cent which we can easily buy to make it compliant to the banking regulation of holding 50 per cent," he said.

S&P Ratings said the proposed merger will likely result in significant market share gains for HDFC Bank, given HDFC is the largest mortgage lender.

It will raise HDFC Bank's loans by 42 per cent to around Rs 18 lakh crore ($237 billion), and increase the market share to about 15 per cent, from 11 per cent now.

Post-merger HDFC Bank will be twice the size of ICICI Bank, which is the third-largest bank now.

This is the second reverse merger in the banking sector after ICICI Ltd did a similar amalgamation with its banking arm ICICI Bank in October 2001.

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