HDFC-HDFC Bank Merger: A marriage made in heaven or need of the hour? What does it mean for merged entities and investors?

HDFC Limited is all set to be merged with HDFC Bank as part of transformational merger, said regulatory filing by the two companies on Monday.  Post-merger, HDFC Bank will be a 100% owned by public shareholders and existing shareholders of HDFC Limited will own 41% of HDFC Bank.

Also, subsidiaries of HDFC Limited will become subsidiary/associates of HDFC Bank after the merger exercise. HDFC Limited shareholders will receive 42 shares of HDFC Bank for 25 shares of HDFC Limited as per the scheme of arrangement. 

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The combined Market cap of the two to be merged entities would be about Rs 13,83,498.26 crore. 

Buoyed by the announcement, shares of HDFC Bank and HDFC Limited reacted positively and surged up to 16% in the early trade, with the latter hitting upper circuit. 

As the two leading companies of the financial sector have decided to merge, analysts largely believe it is a positive development for both entities, however, they also think it might not be entirely a merger of choice- Experts' take:    

Santosh Meena, Head of Research, Swastika Investmart Ltd.   

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.

Earlier NBFC’S used to enjoy regulatory arbitrage vis-à-vis banks, but the regulatory authorities have harmonized the same, thus making this merger necessary and creating a competitive advantage over its peers.   

The proposed merger will enable HDFC Bank to build its housing loan portfolio. The housing loan market is at the cusp of a strong up-cycle along with tailwinds for the real estate sector, and it provides a steady secured asset class with very attractive risk-adjusted returns. 

This will increase the balance sheet size of the merged entity, enabling it to underwrite large ticket size loans. Overall, this is a marriage made in heaven, creating increased scale, comprehensive product offering, balance sheet resiliency, and the ability to drive synergies across revenue opportunities, operating efficiencies, and underwriting efficiencies, hence benefiting stakeholders of both the companies. 

VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services  

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 a far better than a buyback at higher prices.

This mega-merger will correct the recent underperformance of the HDFC twins. The stock prices of HDFC twins are likely to remain firm even after this morning's sharp spike. 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. 

The merged entity will gain from the synergies of the merger. The mortgage business will gain from the low-cost funds of the bank and the bank will gain from HDFC's competence in mortgage lending. The Indian economy will benefit from larger investment by the merged entity in large infra projects. India will have a large global bank 

Ajit Kabi, Banking Analyst at LKP Securities 

The amalgamation between HDFC Bank and HDFC Ltd is a fruitful deal for both the parties. We expect the technological platform to be well synchronized and shall enable the bank to build a larger housing loan portfolio. The proportion of unsecured loans will be narrowed down and it will drag down the risk weight, hence improvement in the capital buffer. Despite the larger housing book, the NIMs are likely to stay stable as the bank’s aggressive approach to build a low-cost CASA deposit. The valuation (4x) is still attractive after double-digit single day growth. We believe it’s the win-win situation for both shareholders.  

Samir Bahl, CEO, Investment Banking at Anand Rathi Advisors  

This is India's largest and most transformational mergers in the Indian financial services sector. With this merger, HDFC bank gets an unparalleled advantage through the mortgage portfolio, providing it a quantum leap in distribution to semi urban and rural areas with a huge opportunity to cross sell bank products to a very-very sticky client base. 

The combined entity will be able to extract substantial synergy benefits which bode well for all stakeholders and shareholders. We are already seeing that in the market reaction to this unprecedented announcement today. 

Ravi Singh, Vice President and Head of Research, Share india* 

HDFC Bank reported loan growth of 21% year on year and retail deposit growth is healthy. The operating profits may also see a surge on strong commercial banking and corporate segment. The merger of HDFC Bank and HDFC is a complement to the investors and a value addition to HDFC Bank 

Manoj Dalmia, Founder and Director, Proficient equities Private limited 

This merger will help expand the customer base and build a product portfolio in the housing loan category. We expect a great future ahead for this giant and this merger might be a game-changer in their segment. Recommend to buy this stock and accumulate it on dips.  

Ravi Singhal, Vice Chairman, GCL securities Limited 

The merge will prove out to be beneficial for both as HDFC Ltd will come out from a holding company discount, whereas the HDFC bank will now get more home loan in its portfolio. 

Abhay Agarwal, Founder, and Fund Manager, Piper Serica

The timing of the merger has caught everyone by surprise but the merger itself is not surprising. With a tightening of the regulatory environment, especially with regards to the NPA recognition norms of the high-margin builder-lending book of HDFC and increased competition from public sector banks and new-age fintech companies, it is not entirely a merger of choice. 

The merger will be more beneficial to HDFC Ltd. since it has a lower profitable business and with HDFC Bank it can increase its product penetration. However, business-related synergies could have been driven without the merger also.  

However, it has its work cut out. While the markets have given a euphoric reaction to this news, we believe that the earnings of HDFC Bank could be downgraded in the near term and the onus will be on the management to prove the upside of the merger through operating performance. 

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)