HDFC to merge with HDFC Bank, shares jump 14%; check combined shareholding structure, share exchange ratio

Shares of HDFC Bank and HDFC rose nearly 10% on the benchmark index on Monday.

HDFC, HDFC Bank

The board of directors of HDFC have approved the merger of India’s largest housing finance firm HDFC (Housing Development Finance Corporation) with India’s largest private sector bank HDFC Bank, the company said. The deal is expected to build the bank’s housing loan portfolio and enhance its existing customer base. Under the proposed agreement, HDFC Bank will be 100% owned by public shareholders, and existing shareholders of HDFC Limited will own 41% of stake in HDFC Bank. For every 25 equity shares held by HDFC shareholders, they will receive 42 equity shares of the combined company per the share exchange ratio. On Monday, shares of HDFC Bank rose 14% on the benchmark indices while shares of HDFC jumped over 16%  on NSE Nifty and BSE Sensex.

“The proposed transaction is to create a large balance sheet and net-worth that would allow greater flow of credit into the economy. It will also enable underwriting of larger ticket loans, including infrastructure loans — an urgent need of the country,” the company said. 

The merger will be a two part merger wherein as a first step HDFC units HDFC Investments Limited and HDFC Holdings Limited will merge with HDFC Limited. The next step of the merger will be amalgamation of HDFC Limited with HDFC Bank. When combined, the total assets of HDFC Ltd and HDFC Bank are worth over Rs 25 lakh crore. HDFC has a turnover of Rs 35,681.74 crore while HDFC Bank has a turnover of Rs 1.16 lakh crore as on December 31, 2021.

“This is a merger of equals,” Deepak Parekh, Chairman of HDFC Limited, said. “We believe that the housing finance business is poised to grow in leaps and bounds due to the implementation of RERA, infrastructure status to the housing sector, government initiatives like affordable housing for all, amongst others. Over the last few years, various regulations for banks and NBFCs have been harmonised, thereby enabling the potential merger,” he added.

A merger made in heaven: Experts view on the proposed deal

I think it (HDFC-HDFC Bank merger) is a good thing for the Indian banking system. India wants to upsize its banks to a global scale and it will be a good thing for Indian banking, especially for private sector banks, former RBI governor D Subbarao told BloombergQuint.

Santosh Meena, Head of Research at Swastika Investmart Ltd said overall this deal is a marriage made in heaven. “The proposed transaction will enable HDFC Bank to build its housing loan portfolio and enhance its existing customer base. For HDFC Ltd. the biggest gain will be access to well-diversified low-cost funding and a huge customer base of HDFC Bank Ltd,” he added. 

“The merger of HDFC with HDFC Bank is an unprecedented mega-merger which will benefit all stakeholders. The shareholders of both entities stand to benefit substantially as already reflected by the sharp up moves in their stock prices. For shareholders, this is far better than a buyback at higher prices,” VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services said. “From the valuation perspective, the HDFC twins are even now only attractively priced in a highly valued market. FPI’s strategy of sustained selling in HDFC twins has been proved to be a short-sighted decision,” he added.

The proposed deal is now subject to approval of regulatory bodies such as Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), the Competition Commission of India, and the  National Housing Bank. The deal is expected to be completed in about 18 months. 

BoFA Securities, Credit Suisse, Kotak Securities, and Jefferies were among the financial advisors to HDFC Limited. Morgan Stanley, JP Morgan, and Goldman Sachs were among the financial advisors to HDFC Bank.

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