💎The Union of Behemoths: HDFC Bank and HDFC Ltd

In an event that has sent ripples across the Indian banking industry, the HDFC Twins - HDFC Bank and HDFC Ltd. – have merged. This landmark move marks a significant shift in the landscape of the Indian banking sector, promising to redefine the future of banking in the country.

The HDFC companies have been pillars of stability and growth in the Indian economy. Their merger is not just a business decision; it's a momentous event that will shape the trajectory of the banking industry in the years to come.

In this edition, we delve into -

1. The journeys of HDFC Bank and HDFC Ltd.
2. The details of the merger
3. The implication of the merger on shareholders, clients, and the broader banking ecosystem.

The HDFC twins - A brief understanding

HDFC Bank: the banking behemoth

HDFC Bank, incorporated in 1994, is one of India's leading private sector banks. It offers a wide range of financial products and services to over 56 million customers nationwide. From retail banking, wholesale banking, and treasury operations, HDFC Bank has been a pioneer in the Indian banking sector.

As of 2023, HDFC Bank has a network of 7,821 branches and 19,727 ATMs across 3,811 cities/towns. With a market capitalisation of over INR 9.65 lakh crores, it is one of India's largest banks by assets.

HDFC Ltd.: the mortgage maestro

Housing Development Finance Corporation Limited (HDFC Ltd.), established in 1977, is India's premier housing finance company. It has been instrumental in transforming the lives of millions by providing access to home loans, thereby fuelling the dream of homeownership in India.

HDFC Ltd. has a wide distribution network of 651 outlets, which includes 206 offices of HDFC's distribution company, HDFC Sales Private Limited. It also has offices in London, Dubai and Singapore and service associates in the Middle East region to cater to Non-Resident Indians and Persons of Indian Origin.

As of 2023, the market capitalisation of HDFC Ltd. is around INR 5.33 lakh crores. Its commitment to enhancing shareholder value while prioritising social responsibility has made it a beloved and respected brand in the Indian financial landscape.  

Why are they merging?

By merging HDFC Bank and HDFC Ltd., the aim is to create synergies, address regulatory challenges, enhance customer reach, and strengthen their financial position. This strategic move reflects the commitment to adapt to evolving market dynamics and seize opportunities for sustainable growth.

3 key reasons drive the merger of HDFC Bank and HDFC Ltd.:

1. Regulatory efficiency: Combining the two entities reduces regulatory complexities for NBFCs and streamlines operations. The merger also helps meet the RBI's requirement of a combined Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) of 22% for banks.

2. Increased customer penetration: The merger enables cross-selling opportunities, reaching untapped customer segments for both entities.

3. Diversified loan mix and stronger capital: The merger combines diverse loan portfolios and a larger capital base for enhanced growth opportunities.

The mega-merger - key points

Here are some key points about the merger between HDFC Bank and HDFC Ltd:

• HDFC Bank has over 7,000 branches across India, serving nearly 3,000 cities and towns. The merger creates a combined balance sheet of around INR 17.87 lakh crores and a net worth of approximately INR 3.3 lakh crores, making HDFC Bank nearly double the size of peers like ICICI Bank.
• The merger allows HDFC Bank to tap into the untapped customer base of HDFC Ltd, with 70% of HDFC Ltd. customers not associated with the bank. This presents significant cross-selling opportunities.
• The merger strengthens the merged entity's position to become the 4th largest lender in the world, with a combined market cap of over INR 14 lakh crore.
• HDFC Bank's mortgage business has grown at a CAGR of 24.5%, reaching INR 702.2 billion in 2021. With the merger, the loan book will significantly contribute from mortgages, accounting for approximately 33% and benefiting from the segment's rapid growth.
• HDFC Bank's CEO, Sashidhar Jagdishan, will lead the merged entity.
• HDFC Ltd customers' loan accounts will be transferred to HDFC Bank after the effective date of the merger. However, HDF Ltd's portal and mobile application will continue to operate as usual.

How does the merger impact you?

The merger of HDFC Bank and HDFC Ltd has significant implications for both shareholders and clients.

Impact on HDFC Shareholders:

• Existing shareholders of HDFC Ltd. will own 41% of HDFC Bank, providing them with ownership in the larger, combined entity.
• The merger brings increased scale and reach of business, offering the potential for improved growth prospects and market position.
• The consolidation is expected to result in a lower cost of funds for the mortgage business, benefiting shareholders.
• Enhanced product and service offerings may arise from the integration, catering to customers' evolving needs.

Additionally, it is important to note that at least 60 equity mutual fund schemes will see their combined exposure to HDFC Bank and HDFC exceed the 10% cap set by SEBI (Securities and Exchange Board of India) rules. Considering the regulatory limitations, this may prompt mutual fund investors to reassess their investment decisions.

Impact on HDFC Clients:

• The integration of banking services with housing finance solutions is likely to lead to the development of innovative products and offerings tailored to the needs of homebuyers.
• Clients may benefit from customised loan packages, competitive interest rates, and streamlined processes for home loan applications.
• An expanded branch network and improved digital banking experience may enhance accessibility to banking services and customer support.
• The merged entity's combined resources may result in an extended range of financial products and services, offering clients more choices and opportunities for their financial needs.

The merger presents opportunities for both shareholders and clients, with potential long-term benefits such as improved financial capabilities, enhanced profitability, and increased shareholder value. However, short-term impacts on stock prices may be influenced by market sentiments and investor confidence as investors reassess their positions in light of the merger.

As the journey of HDFC Bank and HDFC Ltd. unfolds, the merger sets the stage for an exciting future characterised by synergies, customer-centric solutions, and a stronger presence in the Indian financial landscape.