HDFC Bank announces merger with HDFC Ltd

Q. What is the announcement?

The Board of Directors of HDFC Ltd and HDFC Bank, at their respective meetings, approved a composite scheme of amalgamation for amalgamation of: (i) HDFC Investments Ltd and HDFC Holdings Ltd, with and into HDFC Ltd; and (ii) HDFC Ltd with and into HDFC Bank, and their respective shareholders and creditors.

Q. That’s the technical announcement. Can you explain it to me in a simple language?

Okay. What is simply means is HDFC Bank, India’s largest private sector bank by market valuation, would be acquiring HDFC Ltd., India’s largest non-banking financial corporation (NBFC).  Interestingly, HDFC Bank was promoted by HDFC Ltd way back in 1994. It has also promoted other subsidiaries, some of whom are listed now e.g. HDFC Life and HDFC AMC, besides unlisted ones like HDFC Ergo General Insurance etc. All these subsidiaries would now become a part of HDFC Bank.

Q. What does it mean for the shareholders of HDFC Ltd. And HDFC Bank?

Shareholders of HDFC Ltd., as on record date, which will be announced later, will receive 42 shares of HDFC Bank of face value of Rs 1 each for 25 shares of HDFC Ltd. Of face value of Rs 2.Hence, once the transaction is completed, there would be only listed entity, which is HDFC Bank.Post closure, HDFC Bank will be 100% owned by public shareholders and existing shareholders of HDFC Ltd will own 41% of HDFC Bank.

Q. By when is the transaction expected to close?

Management of both the firms have indicated a timeline of ~18 months for closure, subject to regulatory and other approvals.

Q. What would be the new combined entity look like?

Post-merger, HDFC Bank would be one of the largest listed entities in the country with a combined balance sheet of Rs 17.87 lakh crore and Rs 3.3 lakh crore net worth.

Q. What are the synergies of the merger?

As discussed above, HDFC Bank is India’s largest private sector bank with a loan book of Rs 12.6 lakh crore, while HDFC Ltd is India’s largest NBFC engaged in the housing finance business with an AUM of ~Rs 5.2 lakh crore.HDFC Ltd would benefit from the bank’s lower funding cost. HDFC Bank would gain product expertise in mortgage space and help reduce cost/income ratio.The merger would provide better cross sell opportunities for bank with direct access to HDFC Ltd’s customer base. The merger will result in reducing HDFC Bank's proportion of exposure to unsecured loans.

Disclaimer: ICICI Securities Limited has been appointed as financial advisors to HDFC Bank. This Q&A has been prepared on the basis of publicly available information. ICICIdirect has an “Unrated” call on the stock.