RBI approves the merger of HDFC Ltd with HDFC Bank

Just a couple of days after the merger of HDFC Bank and HDFC Ltd was given the no objection certificate by the BSE and the NSE, the nodal regulator RBI has also cleared the merger proposal. It was expected that the RBI may pose objections to the fact that HDFC also has a very thriving life and general insurance business. Normally, RBI has been averse to the idea of banks also having a strong insurance franchise due to the different types of risk involved. This clears the biggest roadblock to pushing through with the merger.

 
Of course, there are still more approvals along the way. The merger will need the approval of IRDAI due to the insurance business of HDFC. Also, the Competition Commission of India (CCI) and the NCLT also have to approve the deal. Once that is done, the boards of HDFC Ltd and HDFC Bank Ltd will have to place the merge proposal and seek the approval of the shareholders and the creditors of the respective financial institutions before the deal can finally go through. The entire process is expected to take more than a year.

Once all the requisite approvals are in place, HDFC Bank will become a 100% publicly owned institution, with HDFC’s holding getting extinguished and HDFC shareholders becoming shareholders of HDFC Bank. Shashidhar Jagdishan, the MD & CEO of HDFC Bank since October 2020, will lead the merged entity. The merger will create a behemoth with market capitalization of $169-billion will be among the 10 major banks in the world in terms of market capitalization. The swap ratio for the shareholders of HDFC Ltd will be 42:25.

The merger will bring some unique synergies for HDFC group. For starters, it will make the combined entity twice as large as ICICI Bank and will sharply narrow the gap between HDFC Bank and market leader State Bank of India (SBI). Its combined book size after the merger will be worth Rs18 trillion with a strong reach and distribution franchise across banking and other financial products. On the downside, HDFC Bank will have to maintain a lot more of provisions for the substantially expanded asset book and also boost its capital buffers.

The real challenge will be integrating the two entities in terms of strategies and in terms of sync with the objective. For now, the assurance is that HDFC staff will be fully absorbed by HDFC Bank. However, that could pose a big cost burden and going ahead some rationalization will have to follow. Also, HDFC staff comes with a typical home loan culture and it is doubtful if they can fit into a culture that is competitive and focussed on the liability and the asset side of the banking business. That remains a practical challenge.

The bigger challenge would be selling the idea of the merger to the HDFC Bank shareholders who are apparently getting a raw deal despite their higher market cap. That is something the institutional shareholders of HDFC Bank are likely to object to. It is likely to be an interesting battler and the top brass of HDFC Bank will call upon all their charm to push the deal through.