July 15, 2023
Hello and welcome to All Indians Matter. I am Ashraf Engineer.
India’s largest private sector bank, HDFC, and its sister firm, the mortgage major HDFC Ltd, have merged, creating a financial services behemoth with an estimated market capitalisation of Rs 14.37 lakh crore. The merger has been hailed by most observers as good for shareholders and customers. With the merger, HDFC Bank becomes the fourth largest lender in the world in terms of equity market capitalisation – roughly $172 billion – through the all-stock transaction valued at $40 billion. The combined entity now ranks behind only JP Morgan Chase & Co, Industrial and Commercial Bank of China and Bank of America Corp in equity market capitalisation. HDFC Bank is now a financial services giant with combined assets of Rs 18 lakh crore. The total business of the merged organisation was Rs 41 lakh crore at the end of March 2023 with a combined profit of Rs 60,000 crore. On the stock market, the combined shares will have the highest weightage on the indices, close to 14%, way higher than Reliance Industries which has a 10.4% weightage. These are, of course, staggering numbers. But what does the merger mean for you, the customer?
So, how does the merger of the HDFC twins help you? For HDFC Bank, it’s a fundamental shift – from distributing products to becoming a true, full-service financial services conglomerate. That’s banking, insurance, investment products such as mutual funds, portfolio management and trading platforms. Its key subsidiaries include HDFC Securities, HDB Financial Services, HDFC Asset Management, HDFC ERGO General Insurance, HDFC Capital Advisors and HDFC Life Insurance.
Essentially, what that means is customers can get every single financial need fulfilled under one roof. For HDFC Bank, it offers the opportunity of locking in the customer at every stage of his or her life. If they need an education loan, HDFC can offer it. Later, if they need a home loan or wish to start making investments, HDFC can offer it. HDFC can cross-sell a number of products to its customers through its digital platforms.
It could also mean that HDFC Bank customers can avail of services in the array at better prices, making them more attractive and helping the customers create assets at cheaper prices. For example, if you avail of certain HDFC financial services, the bank could decide to offer you a home loan at a cheaper rate. This would make it easier for you to buy a home.
As far as the shareholding goes, 41% of the bank will be owned by existing shareholders of HDFC Ltd. Every HDFC Ltd shareholder will get 42 shares of HDFC Bank for every 25 shares they hold.
The merger is likely to transform the financial services market. HDFC Bank was already the second largest bank and the largest private sector bank in India. Now, with greater efficiencies, it is set to get even more competitive, forcing others to follow suit. The financial services sector is very competitive anyway with banks and, more recently, fintech firms making a mark.
The merger, observers said, made sense because the two organisations had different products and coming together plugs the gaps each one had. The bank had most financial products other than those related to housing. HDFC Ltd, on the other hand, did only housing.
HDFC Ltd was set up by HT Parekh, uncle of outgoing chairman Deepak Parekh, in 1977. HDFC Bank was launched in January 1995, after the Reserve Bank allowed private players in the banking sector. Today, HDFC Bank has more than 6,300 branches globally and 18,000 ATMs. HDFC Ltd has 464 offices across India.
But, why merge?
It was reported in the media that three factors drove the merger: the prevailing low-interest rate environment, the RBI had lowered the cash reserve ratio and statutory liquidity ratio requirement and there was high liquidity in the system.
The other factor could have been that the HDFC Ltd leadership was aging. It may have been felt that the question of succession was probably better managed through a merger.
The management is also betting that the combined balance sheet will not only create greater shareholder value but also drive profits higher. HDFC Ltd was less profitable and with the merger it can drive product penetration and lower funding costs. With the mortgage business, HDFC Bank gets a major boost on the distribution front, giving it access to semi-urban and rural areas. There is an opportunity now to cross-sell its products in these regions.
The merger comes on the back of a tilt towards consolidation in the banking sector. For instance, Axis Bank’s recent acquisition of Citibank’s retail business in India for Rs 12,325 crore. IDBI Bank, meanwhile, is likely to be up for privatisation too.
The merger has its challenges, make no mistake. The regulatory environment is getting tighter and the overall economy is showing worrying signs that could hit the financial services business. Jobs are not being generated the way they should be and inflation remains a serious concern.
Nevertheless, in the balance, the merger is being seen in a very positive light and expected to benefit the overall economy. The combined balance sheet and wider capital base will increase credit flow. The larger balance sheet would enable the underwriting of large-ticket infrastructure loans, which is a critical need at the moment. This, in turn, would accelerate credit growth in the economy, boosting the housing sector and increasing credit availability to even the agriculture sector.
So, at the moment, the merger seems like a win-win for all.
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