Merger of HDFC and HDFC Bank

There was a tinge of nostalgia on 30th June 2023. It was to mark the end of tenure of several institutions. It would mark the last board meeting of HDFC Ltd, which officially merger with HDFC Bank effective from July 01, 2023. The stock of HDFC Ltd will now delist from the bourses on July 13, 2023. But there is more to come. For 45 years, the name HDFC was synonymous with the names of two persons viz. Mr. HT Parekh and his equally illustrious nephew Mr. Deepak Parekh. It was the duo that virtually invented the housing finance business in India in 1978 and converted it into one of the most brilliant opportunities in India. The date June 30, 2023 also marked the last meeting that Deepak Parekh would address as the chairman of HDFC Ltd. He officially hangs his boots after a 45 year tenure with HDFC Ltd, making it a formidable name in the process.

How will the merger be effected?

The merger is official and HDFC Ltd will cease to exist post the merger. Shareholders of HDFC Ltd will get 25 shares of HDFC Bank for every 17 shares held by them currently. Once the swap ratio is completed, HDFC Ltd shareholders will own about 41% of HDFC Bank and the bank will now become the surviving company that will be entirely held by public shareholders. HDFC Ltd shares will be extinguished post the merger and will cease to exist as an entity. All the businesses of HDFC Ltd including the assets, liabilities and the employees would now be officially absorbed under the HDFC Bank banner. HDFC Bank will see substantial dilution in equity but this will also be accompanied by proportionate enhancement in the size of the balance sheet for the combined entity. The entire housing finance business will now operate as a unit of HDFC Bank Ltd.

How big will the combined entity be?

In India, the rankings per se don’t change much. HDFC Bank is the largest private sector bank in terms of business and the second largest among Indian banks after SBI. That ranking will continue, although HDFC Bank will now substantially narrow the gap with SBI and widen its gap with ICICI Bank in terms of asset size. Here are some key points to note.

• The combined market cap of the merged entity will be $178 billion and it would substantially narrow its gap with Reliance Industries and TCS in the big league. Also, in terms of market cap, HDFC Bank will now become the fourth most valuable bank in the world after JP Morgan, ICBC and Bank of America. HDFC Bank will now be more valuable than HSBC and Well Fargo globally.
   
• The merger will combine the HDFC Bank loan book of Rs16.14 trillion with HDFC Ltd loan book of Rs7.24 trillion creating a combined entity with loan book of over Rs23.5 trillion. The combined deposit base of the merged entity will be Rs20.3 trillion.
   
• The combined entity will boast of over 8,300 branches and combined employee strength 173,000. For now, it is now known if there will be any rationalization of branches and workforce, although the merger had promised that there will not be any workforce reduction of the HDFC Ltd staff.
   
• As a result of the merger, the cost to income ratio of HDFC Bank will drop sharply from 40.4% to 36% immediately and eventually to 32%. That is because HDFC Ltd has a very low cost to income ratio of just about 9.2%. That is likely to help boost the profitability of HDFC Bank post the merger.
   
• The combined entity will see the return on assets (ROA) static at around 2.1% post the merger but the return on equity (ROE) is likely to improve by nearly 150 bps post the merger. HDFC Bank has a much better ROE than HDFC Ltd but the gains will come from cancellation of equity post the merger.
   
• Finally, the merged entity will cater to about 8.85 crore customers, which is nearly 6% of the Indian population. That is going to be a massive reach and would be a boost for offering other financial services including advisory services.

Overall, the deal is expected to be value accretive for HDFC Bank while the HDFC Ltd shareholders should also gain from an attractive swap ratio.