Oince seven years after mortgage lender Housing Development Finance Corporation (HDFC) was first contemplated merging with the largest private lender HDFC Bank, the inevitable was announced on Monday April 4th.
HDFC’s Board of Directors has approved the merger with HDFC Bank, which would include its wholly owned subsidiaries HDFC Investments Limited and HDFC Holdings Limited with HDFC Bank. HDFC will own 41% of HDFC Bank. HDFC shareholders will receive 42 HDFC Bank shares for every 25 Non-Banking Finance Company (NBFC) shares they own.
The deal, whose regulatory approvals are pending, is expected to close within the next 12 to 18 months, according to officials from the two institutions. Until then, the two institutions will continue to operate as independent entities, as they do today.
HDFC Chairman Deepak Parekh in his opening remarks to announce the mega-deal said, “No one in the press could decipher this. Tomorrow’s news you’re supposed to give today. I was disappointed. You failed this time,” he joked. The boards and legal teams of both organizations had been actively working on the deal for three weeks. “It’s a merger between equal,” he said.
Investors cheered the move in Monday morning trading, with HDFC and HDFC Bank shares gaining handsomely. HDFC Bank rose 14.3% to a daily high of 1,721.8 rupees before falling slightly to 1,656 rupees in afternoon trading. HDFC stock froze in early trading on Monday at 621.5 rupees, up 10% from its previous close. This merger will likely create India’s third-largest company by market capitalization, behind Reliance Industries and TCS.
Why merge now?
Parekh in previous years has talked about the possibility of merging HDFC with HDFC Bank. It was not seriously considered or did not materialize in 2015 because the regulatory environment was not sufficiently conducive. In recent years, the Reserve Bank of India (RBI) has tightened regulatory and capital standards for NBFCs, which include HDFCs. This meant that NBFCs could not really operate with a lower level of regulation. Being part of a bank probably made more sense at this point.
The second reality is that HDFC Bank, although an aggressive private lender, has been a weak player in mortgage lending. Home loans make up only about 6.2% of HDFC Bank’s loan portfolio by product and a further 4.5% are loans against property, based on the bank’s December 2021 data.
“HDFC Bank will enable seamless home loan delivery and leverage across HDFC Bank’s broad base of more than 68 million customers,” HDFC Vice President and CEO Keki Mistry told media. Home loans are very sticky assets for banks, once you have the customer he/she will do business with the institution for 15-20 years.
HDFC Bank CEO Sashidhar Jagdishan confessed that in the realm of home loans, the bank “lost customers to other banks” in recent years. In fact, the cross-selling of home and life insurance products is highlighted as the key driver of the merger at this point. In recent years, in addition to private sector banks such as ICICI Bank and Kotak Mahindra Bank, a range of housing finance companies such as LIC Housing Finance, L&T Housing and IIFL Housing have been aggressive lenders to clients.
The other problem is obviously a low interest rate regime. The pressure to maintain higher statutory levels in the form of statutory liquidity ratio (SLR) and cash reserve ratio (CRR) requirements is lower for a bank than under a high interest rate regime. And while interest rates are likely to rise over the next 12 to 18 months – when the deal is likely to close – Mistry thinks “they would be even lower” under a high interest rate regime of 2015-16.
Alarm bells for other banks
Leading fund managers and analysts have praised the deal’s rationale and timing. “HDFC Bank was selling home loans but reselling them to HDFC. To maintain the growth of its loan portfolio at 20%, HDFC Bank had to manage very difficult to manage shorter-term retail assets. Now, the tenor of HDFC Bank’s assets will increase and the loan portfolio will become stickier. For every drop of sweat HDFC Bank spends, they get more for their money,” said Saurabh Mukherjea, Founder of Marcellus Investment Managers.
Independent banking expert Hemindra Hazari said: “For some reason they probably felt that HDFC would struggle to continue operating on its own…the merger will help HDFC now. One of the major challenges of such a merger is, of course, culture. HDBC Bank is a dominant player, in terms of balance sheet size and workforce. »
“The merger will help expand the customer base and build the product portfolio in the home loan category. This merger could be a game-changer in their segment,” says Manoj Dalmia, Founder and Director of Proficient Equities.
Although this merger will take place over the next 12 to 18 months, it does sound alarm bells for existing banks. Already recently, Axis Bank announced the strengthening of its retail banking business by acquiring the consumer banking business of Citi India for $1.6 billion.
Mukherjea asserts that there are considerable economies of scale in running large-scale financial services operations, in the form of data/technology, distribution power and cost of capital. “Today, four great empires are being built: the HDFC Bank empire, the Axis Bank empire, the ICICI Bank empire and the Bajaj Finserv-Finance empire. It will put enormous pressure on anyone who doesn’t have that scale,” says Mukherjea. “The bugle rang loud and clear, either grow big or die trying.” This will thus pave the way for more mergers and acquisitions for other banks and NBFC.
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