HDFC Bank, the leading private sector bank in India, has accomplished the merger with HDFC Ltd., the country's premier housing finance company, after receiving all necessary approvals. This monumental merger, finalized on July 1, 2023, has given birth to a financial powerhouse with combined asset base of around INR 18 lakh crores and net worth of INR 4.14 lakh crores, as per News18. All of HDFC Ltd.'s businesses, assets, liabilities, and employees are now part of the merged entity - under the HDFC Bank banner.

HDFC Ltd., a promoter of HDFC Bank, held 20.9% of the bank's share capital. However, post-merger, the HDFC Bank does not have promoter. HDFC Ltd. ceased to exist as separate entity and all its shareholders are now shareholders of HDFC Bank. On July 13, 2023, the stock of HDFC Ltd. was delisted from the stock exchanges. As a result, HDFC Bank is now entirely owned by public shareholders, with the existing shareholders of HDFC Ltd. holding 41% stake in the bank.

After the reverse merger, all of HDFC Ltd.'s subsidiaries and associate companies, including HDFC Life Insurance, HDFC ERGO General Insurance and HDFC Asset Management Company Limited, will come under the ownership of HDFC Bank.

This has been a momentous event reshaping the financial landscape of India, further cementing HDFC’s position as the biggest player in the banking and housing finance sectors. This makes it crucial for us to understand the impact this merger has on different stakeholders:

1. Shareholders: Value Creation

Pursuant to the decided share exchange ratio, HDFC Bank issued and allotted 42 new equity shares (face value of Re. 1/- each) for every 25 equity shares (face value of Rs. 2/- each) held by such shareholder in HDFC Ltd. as on July 13, 2023 (record date).

Shareholders stand to benefit from higher value creation and returns as the merged entity leverages its scale, synergies, and diversification. However, shareholders may experience some volatility in stock prices and benchmark indices during the initial phase. It's important to note that income tax implications for shareholders will arise only upon the sale of HDFC Bank shares obtained in exchange for HDFC's shares.

Post-merger, HDFC Bank replaces HDFC in the MSCI India Index, opening up opportunities for FPIs.

2. Merging Entities: Rise of a Financial Services Conglomerate

HDFC Bank, which was previously a distributor for various financial products, has transformed into a financial services conglomerate offering a full suite of services, from banking to insurance and mutual funds through its subsidiaries. This merger allows HDFC Bank to enhance its product expertise in the mortgage space, reduce the cost/income ratio and offer better cross-sell opportunities to customers of HDFC Ltd. In case of home loan, there is specific opportunity to cross sell over the long repayment lifecycle.

Surprisingly, 70% of HDFC customers do not bank with HDFC Bank; and only 2% of the bank’s customers have a mortgage from HDFC – this means a huge scope for cross selling.

Further, HDFC Ltd. now gained access to HDFC Bank’s low-cost deposits and HDFC Bank in turn got longer duration assets in the books. Win-Win!

3. Customers Rejoice: A One-Stop Shop

Customers can now access a wider range of products and services under one roof, with competitive pricing and added convenience. The integration of banking services with housing finance solutions is expected to result in innovative products and offerings tailored to the needs of homebuyers. The expanded branch network and enhanced digital banking experience will further elevate the customer experience.

Existing home loan customers will not experience any immediate changes to their interest rates, repayment terms or account numbers. However, the merger may lead to future changes in loan conditions as the two entities align their operations.

4. Employees Stand United

This merger does not disrupt the employment of any staff members, as the activities of both entities are complementary and do not overlap. HDFC Bank will rely on the expertise of HDFC employees, particularly in mortgage origination and loan servicing processes. While some organizational restructuring and realignment of roles and responsibilities may occur, the merged entity aims to prioritize the best interests of employees, fostering a harmonious and productive work environment. Opportunities for cross-functional collaboration, skill development and career growth within the merged entity are expected.

5. Economic Boost and Competitive Landscape

The larger balance sheet and capital base of the merged entity will facilitate greater credit flow, enabling underwriting of larger ticket loans, including infrastructure loans. It will also contribute to the delivery of home loan offerings to a larger customer base and accelerate the pace of credit growth, thereby driving economic development, nation-building, and employment generation.

In terms of competition, HDFC Bank became the third most valuable Indian company by market capitalization, trailing only Reliance Industries and TCS, and maintaining huge gap from ICICI, which stands at fourth position.

It will also rise to the fourth position (from eleventh position) globally among banks by market capitalization. This significant achievement positions HDFC Bank as a strong contender in the global banking industry.

6. Mutual Funds and FD Account Holders

Mutual funds face restriction that exposure to a single security cannot exceed 10%, and post-merger, the combined weightage of HDFC and HDFC Bank may rise to 15%. Hence, mutual funds with allocations above 10% may need to sell some shares to comply with regulations, potentially impacting the benchmark.

Existing FD holders with HDFC will experience minimal changes due to the merger. The terms and conditions of their FD, including interest rates and tenure, will remain the same until maturity or renewal. However, the interest rates of FDs in HDFC Bank have typically been lower than those offered by HDFC.

Bottom Line

To conclude, this mega merger is a significant event in the saga of Indian banking and financial services. The combined entity is well-positioned to create significant value for stakeholders through its diverse product offering, enhanced scale, balance sheet resiliency and the ability to drive synergies across revenue opportunities and operational efficiencies.

This development may prompt other banks and financial institutions to reassess their strategies and explore similar mergers or partnerships to maintain competitiveness, as in case of IDFC.

However, with significant scale involved in the merger, the question of whether it could become ‘too big to fail’ would always loom and call for careful management and regulatory oversight.