Not only the two firms, it will help customers, investors and overall economy too
Shruti Ashok | April 11, 2022
Merger as a corporate strategy involves two companies coming together to form a new legal entity under a common corporate name. Mega merger deals have always attracted considerable attention from all stakeholders including customers, employees, and investors. Never mind the scale and magnitude of merger, the prime objective of such an activity always revolves around these major areas: Greater access to newer markets, increased customer base, larger network of branches, geographical expansion, increased wallet share of customers, and finally better utilisation of capital.
The latest announcement of HDFC merging into HDFC Bank is one of the most talked about developments in banking and finance this month. This merger is one of the biggest banking mergers in global corporate history since 2007, creating an entity twice the size of ICICI Bank. Post-merger, the combined entity will be the 63rd most valued company in the world, and the world’s 5th most valuable lender. This write-up assesses contours of this recently concluded deal, evaluating its likely impact on various stakeholders.
Benefits to HDFC Bank
The merger of HDFC with HDFC Bank will be advantageous to both companies, allowing them to leverage their strengths. “The merger is a coming together of equals. It is like after 45 years and 9 million home loans, we have found a home for ourselves,” said Deepak Parekh, chairman of HDFC Ltd.
While it is no brainer that both HDFC Bank and HDFC would gain significantly from this deal, it weighs in benefit of HDFC Bank by providing it the access to a larger customer base, allowing it to cross-sell both for deposit and investment products. HDFC’s strategic competence coupled with HDFC Bank’s scale and network distribution will enhance the combined entity’s ability to cross sell both banking products and housing products under one roof. Increased balance sheet post the consolidation, would enhance HDFC Bank’s capacity to underwrite larger size loans, giving it an edge over its peers. Simultaneously, HDFC would be benefit by having access to diversified portfolio of low-cost funding and huge customer base of HDFC Bank.
With a customer base of 6.8 crore, customers will be the biggest gainer from this merger. Synergies, both in cost and revenue, are expected to bolster the image and improve customer offerings of HDFC Bank, post-acquisition. After the merger, HDFC Bank’s customers will have the access to mortgage products as a core bank offering. With access to 9 million customers of HDFC, HDFC Bank will be able to offer variety of both credit and deposit products to long term mortgage relationships. This would augment the bank’s product offerings besides enhancing its value proposition for all customers of the combined entity.
Mortgage customers of HDFC Ltd would be benefited by getting access to overdraft facilities on their loan accounts, facilitating them to reduce their interest outgo by depositing their extra money in overdraft accounts. It is to be noted that the benefit of overdraft is available only to mortgage customers of banks.
The proposed merger is expected to benefit the economy in multiple ways. Combined balance sheet and enhanced capital base will enable a higher flow of easy credit into the economy. The larger balance-sheet size post merger would permit underwriting of large-ticket infrastructure loans, which is the need of the hour. Sanctioning of such loans is expected to accelerate credit growth in the economy, expecting to give a fillip to the affordable housing sector, besides increasing flow of credit availability both to priority and agriculture sector.
Post the series of NBFC scams like DHFL and IL&FS, to ensure greater accountability, RBI tightened its noose around these lending institutions and intended to convert large NBFC into banks. In view of these changes, the impending merger of HDFC into HDFC bank is a welcome move.
Post the merger announcement, HDFC Bank shares rose by 9.97 percent to Rs 1,656.45 on the BSE last Monday and HDFC Ltd shares rose by 9.30 percent to close at 2,678.90. The combined market capitalisation of HDFC Bank post-merger will enable it to overtake TCS and become the second largest company as per market capitalisation, after Reliance Industries. After the merger, 100% shareholding in HDFC Bank will be by public shareholders, while existing shareholders of HDFC Ltd will own 41 percent of HDFC Bank. For 25 shares of HDFC Ltd, each shareholder will receive 42 shares of HDFC Bank. With increased prospects for higher profits and reduced costs, share process of share prices of the combined entity would see constant rise.
The combination would allow greater foreign investment in HDFC Bank, which was nearing its quota of foreign investment. With reduction of HDFC Ltd. shareholding in HDFC Bank, earnings per share would also increase, significantly impacting investor wealth.
No matter the expected benefits from merger, for both the parties, it cannot be denied that the amalgamation process needs to be carefully implemented. However, it becomes imperative that banks, post-merger do not follow continue with the earlier policies and do their individual things. Instead, they should focus on building integrated strategies. Special emphasis should be placed on changes/upgradation in technology, alignment of processes of both entities and most importantly integration of people across the two companies.
Shruti Ashok is an assistant professor at Bennett University, Greater Noida.
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