HDFC Bank Merger

Context

HDFC Bank and HDFC Ltd recently announced the merger of the two entities, setting the stage for one of the biggest deals in the Indian financial sector.

About

About Merger:

As per the transaction structure, HDFC Limited, India’s largest housing finance company with Assets under Management (AUM) worth Rs 5.26 trillion and a market cap of Rs 4.44 trillion will merge with HDFC Bank, India’s largest private sector bank by assets with a market cap of Rs 8.35 trillion.
The subsidiary or associates of HDFC Limited will also be transferred to HDFC Bank.
Post the merger, HDFC Limited’s shareholding in HDFC Bank will be extinguished and HDFC Bank will be 100 per cent owned by public shareholders.
Existing shareholders of HDFC Limited will own 41% of HDFC Bank.
The combined market capitalisation will enable HDFC Bank to overtake TCS and become No. 2 in valuation after Reliance Industries Ltd (Rs 18.01 lakh crore).

Benefit:

While this will improve the ability to cross-sell products to a larger customer base, the move will help them leverage their distribution across urban, semi-urban and rural geographies.
A larger balance sheet and capital base will allow greater flow of credit into the economy.
It will enable underwriting of larger ticket loans including infrastructure, which is an urgent need of the country.
The customer will be the biggest beneficiary, it is estimated that as of date over 70% of HDFC Bank’s customers do not have a mortgage further under the combined entity cross sell of the group products insurance both life and non-life, asset management and pensions will see significant improvement in efficiencies and in profitability.
The proposed merger will dovetail the efficiencies of HDFC as a premium mortgage originator with over 45 years of domain expertise, inefficient mortgage processing at a significantly attractive cost income ratio into the lower cost of funds of the bank and its wide distribution capability.
HDFC is a significant provider of home loans to lower income and the middle income group segments under the affordable housing initiatives of the Government of India under the Pradhan Mantri Awas Yojana. Access to housing finance for this category would improve further on account of the low cost funds available with HDFC Bank.