HDFC merger gets RBI nod

HDFC Bank on Monday said the Reserve Bank of India (RBI) has approved its amalgamation with Housing Development Finance Corporation (HDFC).

Once all approvals are in place, HDFC Bank will become a 100% publicly owned institution, with HDFC’s 21% promoter holding getting extinguished.

Sashidhar Jagdishan, who became MD & CEO of HDFC Bank in October ,2020 will lead the merged entity.

The merger would be the largest in Indian corporate history, creating a financial behemoth with a $169-billion market capitalisation (the second-largest in India) and will be among the 10 most valued banks in the world. Shareholders of HDFC will receive 42 shares of HDFC Bank for 25 shares of HDFC.

The merged entity will be twice the size of ICICI Bank, the second largest private bank in the country, and will shrink the gap between HDFC Bank and market leader State Bank of India (SBI).

The merger will result in a sharp rise in competitive intensity in the industry given the new HDFC entity will have a book of close to Rs 18 trillion, which is twice the size of ICICI Bank’s book and the fairly deep distribution franchise.

While the Street has been concerned about how the transition would be managed, as also on how margins might be hurt because of the regulatory  requirements that would be need to be maintained, top executives of the group, nonetheless, acknowledge the synergies and say there is very little overlap in the businesses.

“The RoE is likely to dilute marginally given the differences in return ratios and there would be an impact due to regulatory requirements,” analysts had observed when the merger was first announced in early April.

Moreover, they pointed out that on a much bigger book, loan growth is likely to be slower and likely to be a lot more dependent on the economic conditions.

“The ability to distinctly deliver superior loan growth would be challenging,” they observed. From HDFC Bank’s perspective, the transaction would be considered good given that the loan growth has been decelerating in recent years.

“…please note that HDFC Bank has received a letter dated July 04, 2022 from the Reserve Bank of India (“RBI”) whereby the RBI has accorded it’s ‘no objection’ for the Scheme, subject to certain conditions as mentioned therein,” the lender said in a communication to the stock exchanges.

Last week, the two stock exchanges had given their go-ahead to the proposed merger. The amalgamation remains subject to some other statutory and regulatory approvals, including those from the Competition Commission of India, the National Company Law Tribunal, other applicable authorities and the respective shareholders and creditors of the two entities.