HDFC-HDFC Bank Merger: How Will The Mega Merger Impact The Banking Sector And Markets

HDFC and HDFC Bank announced the completion of their merger following the board meeting which was held on Friday. According to the official statement, the merger will come into effect from July 1, 2023. With this confirmation, the year-long saga of India’s largest ever corporate merger has concluded. 

Announced in April 2022, the deal was valued at around Rs 3.2 lakh crore. Following the announcement of the deal, ratings agency S&P said that the merger would make the bank twice the size of ICICI, the second largest private bank. For some perspective, HDFC Bank’s revenue in the last financial year was around Rs 2 lakh crore while ICICI Bank posted revenue of around Rs 1.3 lakh crore in the same period.  

Opened in 1994, HDFC Bank was one of the first private sector banks to start operations in India following the wave of economic liberalisation in the 1990s. The amalgamation of its parent into the bank marks a new beginning for the firm and the Indian banking sector. While the move was first announced in April last year, rumours about the possible merger of the entities had been around since 2014.  

However, the businesses had to pass several regulatory hoops in the past one year to create a big bank behemoth. When the merger was announced, the bank in its statement had mentioned that it would require clearances from its stakeholders and several regulatory authorities, including Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), the Competition Commission of India (CCI) and stock exchanges BSE and NSE. 

While HDFC Bank has received all the regulatory approvals required for executing the deal, the merged entity has its task cut out to meet the conditions set out by the authorities. One of the key requirements for the bank is to maintain statutory liquidity ratio (SLR) and cash reserve ratio (CRR). SLR is the percentage of deposits that banks are required to invest in government securities while CRR is the percentage of deposits to be kept with RBI. Currently, SLR needs to be 18 per cent while CRR is required to be 4.5 per cent. Along with this, banks are also supposed to maintain a priority sector lending (PSL) target, which is currently 40 per cent. As HDFC Ltd was an NBFC, it had no PSL target to meet. But now, RBI has given HDFC Bank time till FY26 to meet the 40 per cent target for its entire loan book. 

After receiving the necessary approvals and go ahead from their boards, the new banking sector giant is all set to enter the market.  

Big Bank Behemoth 

Adding the market capitalisation (mcap) of both the entities, the combined value would be around Rs 14.7 lakh crore. This would make HDFC Bank the fourth largest bank in the world in terms of mcap, moving ahead of the likes of Morgan Stanley and Wells Fargo. The bank already has the largest mcap among all Indian banks. Following the completion of the merger, it would also have second largest mcap behind Reliance Industries.  

The resulting financial services giant is also expected to be flush with funds, with a balance sheet of around Rs 18 lakh crore. The loan book of HDFC Ltd stood at Rs 5.68 lakh crore at the end of financial year 2022 while HDFC Bank’s loan book in the same financial year was Rs 13.69 lakh crore. All the loans of the mortgage lender would move to the bank, which would swell up its assets under management considerably. It is expected that the move would allow the bank to consolidate its position in the banking sector.  

While announcing the deal in April 2022, HDFC had said in a statement that the transaction would create a large balance sheet and net-worth which would allow “greater flow of credit into the economy”. Suman Chowdhury, Chief Economist and Head of Research at Acuité Ratings & Research, claims that the merger will strengthen HDFC’s position in the market. “The funding position of the whole group would improve as banks have an inherent advantage when it comes to raising funds compared to NBFCs. With a large balance sheet, the merger will surely boost the standing of HDFC Bank in the sector,” Chowdhury says.  

Even before the merger was announced, HDFC Bank used to sell the housing loans of HDFC Ltd through an arrangement with the mortgage lender. However, due to this, it couldn’t maintain its own housing loan portfolio which it would be able to do post the completion of the merger. The new arrangement will also allow the bank to cross-sell its other services to the existing customers of HDFC.  

Chowdhury notes that the biggest beneficiary of this deal is the brand value of HDFC. “Looking at the broader picture, it is unlikely that this merger will have a large impact on the banking ecosystem as both entities have already been operating together for years,” he says. 

Aditya Acharekar, Associate Director at CARE Ratings, feels that the bank would continue to take the cautious approach it is known for when it comes to giving loans. While the merger will strengthen the bank’s position in the housing loan segment, he adds that it will not take any unnecessary risk in the coming days. 

With the merger all set to come into effect, market enthusiasts are keenly watching how the move will impact the stock markets when they open on Monday.    

Unlocking Market Potential 

Investors are keeping a close eye on the merger. Following the announcement of the deal last year, the shares of HDFC Bank and HDFC Ltd witnessed a sharp fall with investors taking a cautious approach as the merger required several regulatory clearances. However, both the stocks recovered in the subsequent months and continued to sustain positive momentum ahead of the tentative date of completion of the merger. 

Dr VK Vijayakumar, Chief Investment Strategiest at Geojit Financial Services, says that the complexity around the merger was weighing on the stocks earlier. He believes that the cautious approach of investors will be a thing of the past now. “The merger of HDFC into HDFC Bank will create a world class financial behemoth which will attract good investment into the stock and value unlocking is almost inevitable,” he says.  

Shareholders of HDFC Ltd will receive 42 shares of HDFC Bank for every 25 shares they hold of the mortgage lender. According to the plan, public shareholders will have a 100 per cent stake in HDFC Bank with HDFC Ltd’s shareholders getting a 41 per cent stake.  

Vijayakumar believes that the merger would allow HDFC Bank to live up to its potential on the bourses. “HDFC Bank has been underperforming the Nifty for the last 3 years despite its decent growth. This underperformance is likely to change post-merger. The bank which has an enviable track record and excellent execution capabilities will gain from the synergy unleashed by the merger.” In the last three years Nifty 50 has posted a growth of around 86 per cent while HDFC Bank share price has seen an uptick of around 60 per cent. 

Sharing Vijayakumar’s enthusiasm, several brokerage firms in the past few months have predicted an upside of around 14 per cent for the HDFC Bank scrip. Following the announcement by HDFC Chairman on Tuesday that the merger will come into effect on July 1, there was a positive rally in share prices of both HDFC and HDFC Bank. The investor sentiment around the stocks reflects the belief in the promises of the businesses when they announced the merger.  

Will The Merger Deliver? 

HDFC noted in its statement post the announcement of merger that the move will allow the bank to write big ticket loans. This, the bank said, would help it in providing more infrastructure loans. The bank also predicts that access to housing loans to low- and middle-income groups would also improve due to the availability of low-cost funds with HDFC Bank.  

In an interview with Outlook Business last year following the announcement of the merger, HDFC’s outgoing Chairman Deepak Parekh had said, “The larger balance sheet and larger capital base will allow greater flow of credit in the economy, it will enable underwriting of larger ticket loans including infrastructure loans which are in need of the country, it will enable delivery of home loan offering to large base of 68 million customers of banks and improve the pace of credit growth of the economy.” 

HDFC envisages a bright future for the new entity as it tries to harness the collective strength of two renowned and well-known businesses. Now, it remains to be seen whether India’s biggest corporate merger can deliver on its promises. Signing off from his role on Friday, Parekh wrote to HDFC shareholders, “Our history cannot be erased and our legacy will be taken forward.” As Parekh’s 45-year career ends, a new chapter in the history of HDFC Bank has just begun.