The Boards of mortgage major Housing Development Finance Corporation (HDFC Ltd) and the country’s largest private sector lender HDFC Bank Friday approved July 1 as the effective date of their merger.
The merger of the HDFC twins was announced in April last year. “The Boards of both the companies at their respective meetings held today noted that the merger would be effective from July 1, 2023,” HDFC Bank said in a statement.
The combined entity with a market capitalisation of Rs 14.37 lakh crore is likely to benefit both the shareholders and customers at a time when the Indian economy is making steady growth.
“This is a defining event in our journey and I’m confident that our combined strength will enable us to create a holistic ecosystem of financial services. We’re truly happy to welcome the talented team of HDFC Ltd into the HDFC Bank family. I believe our journey will be defined by agility, adaptability, and a relentless pursuit of excellence,” said Sashi Jagdishan, CEO and Managing Director, HDFC Bank.
The boards of HDFC twins have fixed the ‘Record Date’ for determining the shareholders of HDFC Ltd who would be allotted the shares of HDFC Bank as per the share exchange ratio as July 13.
“As per the merger scheme, HDFC Bank will issue and allot to eligible shareholders 42 new equity shares of the face value of Re. 1 each, credited as fully paid-up, for every 25 equity shares of the face value of Rs 2 each fully paid-up held by such shareholder in HDFC Ltd as on the Record Date of July 13, 2023,” the release said.
After the amalgamation, HDFC Bank will be completely owned by public shareholders and existing shareholders of HDFC Ltd will own a 41 per cent stake in the bank. The foreign stake is around 8 per cent in the bank and is likely to increase.
The bank said the larger net-worth would allow greater flow of credit into the economy. It will also enable underwriting of larger ticket loans, including infrastructure loans and contribute further to nation building and employment generation.
HDFC Bank has over 6,300 branches globally and 18,000 ATMs. HDFC Ltd has 464 offices across India.
All employees of HDFC Ltd as on effective date would become HDFC Bank employees, the release said.
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 sticky client base. Competition is expected to heat up in the banking segment, especially between HDFC Bank and State Bank of India, the largest Indian bank. The home loan segment has become attractive as non-performing assets are minimal.
Post merger, the key HDFC Bank subsidiaries include HDFC Securities Ltd., HDB Financial Services Ltd., HDFC Asset Management Co. Ltd, HDFC ERGO General Insurance Co. Ltd., HDFC Capital Advisors Ltd. and HDFC Life Insurance Co. Ltd.
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Mortgage major HDFC Ltd and India’s largest private bank HDFC Bank are set to merge on July 1 to create a combined entity with a market capitalisation of Rs 14.37 lakh crore. The merger will benefit both shareholders and customers at a time of steady growth for the Indian economy.
HDFC Chairman Deepak Parekh and HDFC Vice Chairman Keki Mistry said on June 27 that the two companies will have separate board meetings after office hours on June 30, which would be the last board meeting of HDFC Ltd. After the merger, HDFC branches will continue, but the signboards will say HDFC Bank.
“Every employee under the age of 60 will be absorbed and salaries will not be reduced. HDFC Bank will need our people because they don’t have knowledge of mortgages,” Parekh said. There will be no golden handshake for employees of HDFC Ltd.
HDFC has said that the tentative ‘record date’ for determining shareholders of HDFC Ltd who would be allotted equity shares of HDFC Bank as per the share exchange ratio, is July 13, 2023.
“Both HDFC Ltd and HDFC Bank are working towards completing all the necessary formalities for completion of the proposed amalgamation as per the tentative dates,” HDFC said.
Mistry said the two organisations have different products. “The bank has everything other than housing and HDFC Ltd does only housing. The commonality of roles is limited. It is limited to certain corporate functions,” Mistry said.
The merger has received approvals from the Reserve Bank of India (RBI), insurance regulator Insurance Regulatory and Development Authority of India (IRDAI), the National Company Law Tribunal (NCLT) and the antitrust watchdog Competition Commission of India.
IRDAI has also approved the acquisition of shares of HDFC Life Insurance Company and HDFC ERGO General Insurance Company by HDFC Ltd, and the transfer of the entire shareholding of HDFC Ltd in HDFC Life and HDFC ERGO to HDFC Bank.
HDFC Ltd was set up by H T Parekh, the uncle of Deepak Parekh, in 1977. HDFC Bank was started in January 1995, after the RBI opened up the banking sector to private players. HDFC Bank has more than 6,300 branches globally and 18,000 ATMs. HDFC Ltd has 464 offices across India.
So why did the “HDFC twins” decide to merge?
Three key factors made it an opportune time to go ahead with the merger in April 2022. The prevailing low interest rate environment was supportive; RBI had lowered the CRR and SLR requirement from 27 per cent to 22 per cent; and there was high liquidity in the system.
According to a source, there was an additional factor as well: the leadership at HDFC Ltd was closing 70, and in view of the looming question of succession, it was felt that a merger with HDFC Bank will bring the best synergy benefits.
Banking sources said the proposal was put up even when Aditya Puri was MD of HDFC Bank, but could not go ahead due to several concerns. Puri stepped down from the position he had held for 26 years on October 26, 2020.
Although there had been speculation for long, the news of the merger was successfully kept under wraps until the actual announcement.
Does the merger make sense?
With the RBI tightening the regulatory environment for non-banking financial companies (NBFCs), especially with regard to NPA (non-performing assets) recognition norms, and making the regulations almost similar to banks, the incentive for keeping HDFC Ltd and HDFC Bank separate had been diminishing.
Also, banks, led by SBI, and new-age fintech companies have intensified the competition in the home loan segment.
However, business-related synergies could have been driven even without the merger. The bet by the management is that the increased size of the balance sheet of the entity will enable it to increase its competitiveness and create shareholder value. HDFC Ltd posted a net profit of Rs 16,239 crore in FY2023; HDFC Bank’s profit was at Rs 44,108 crore.
Will HDFC Bank benefit from the merger?
The merger will be more beneficial to HDFC Ltd since its business is less profitable — it can increase its product penetration, and funding costs are expected to come down.
However, HDFC Bank will get 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 sticky client base.
“The combined entity will be able to extract substantial synergy benefits which abide well for all stakeholders and shareholders,” said an analyst.
While the merged entity will see some cost synergies, it is difficult to see how the merger will by itself help the merged entity increase its market share. HDFC Bank has been beset by the woes of its digital initiatives, and many parts of its retail banking are under pressure from fintech companies.
HDFC is facing increasing pressure from public sector banks in its mortgage business. However, the management does have the wherewithal to meet the short-term challenges and come out on top, an analyst said.
Another advantage of the merger is that the cost of borrowing will come down for HDFC. When this happens, the combined entity gains in terms of cost efficiencies, and is value accretive for shareholders.
And what will the merger mean for shareholders?
As part of the merger, 42 shares of HDFC Bank will be given for every 25 shares of HDFC Ltd. Post the amalgamation, HDFC Bank will be 100 per cent owned by public shareholders, and existing shareholders of HDFC Ltd will own 41 per cent stake in the bank. The foreign stake is around 8 per cent in the bank, and is likely to increase.
On June 27, the shares of HDFC rose 1.59 per cent to Rs 2,762.50; HDFC Bank gained 1.38 per cent to reach Rs 1,658.00 on the BSE.
What will be the impact on the financial sector?
Competition is expected to heat up, especially between HDFC Bank and SBI, which is India’s largest bank. The home loan segment has become attractive as non-performing assets are minimal.
According to ICICI Securities, HDFC Bank aims to double its balance sheet in five years, exhibiting 15% annual growth. Expanding its physical presence (it plans to double the number of branches in the next three years); focussing on digital capabilities (it plans to change tech stack in three to four years); enhancing the product ecosystem for better customer experience; and a push in newer segments (MSMEs) and geographies (rural and semi-urban areas) could enable the bank to achieve its targeted growth and profitability, it said.
The banking sector is expected to witness further consolidation in the coming months. Axis Bank recently acquired Citibank’s retail businesses in India for Rs 12,325 crore, and the government has put IDBI Bank on the block for privatisation.
According to a Standard & Poor’s ranking, State Bank of India retained its top position after its assets increased 2.64 per cent year-on-year to $725.08 billion. Owing to its proposed merger with HDFC Ltd, the pro forma assets of HDFC Bank rose 57.67 per cent to $441.05 billion, which enabled it to hold on to the second rank. ICICI Bank secured the third spot, with total assets of $238.49 billion.
What can be some of the challenges going forward?
While market participants feel the deal was inevitable given the current environment and shrinking of regulatory arbitrage for NBFCs, the biggest challenge was to meet the regulatory requirements.
A banker said that HDFC Ltd is into developer financing, but HDFC Bank doesn’t do it as of now. While doing it may increase risks, not doing it will weaken the mortgage finance business. Developer finance is key to sourcing mortgage customers from the project.
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Stocks to Watch on Tuesday, May 16: Asia-Pacific shares are trading mixed on Tuesday. Hong Kong’s Hang Seng index climbed 0.72 per cent in early trade, while the Shanghai Composite was marginally lower. In Japan, the Nikkei 225 rose 0.74 per cent, while South Korea’s Kospi advanced 0.37 per cent.
At 7:40 AM, SGX Nifty was up 45 points at 18,449.
China’s industrial output data for April, however, came lower than expected at 5.6 per cent. Markets were pricing-in growth of 10.9 per cent.
Overnight, the S&P 500 added 0.3 per cent, while the Dow Jones Industrial Average advanced 0.14 per cent. The tech-heavy Nasdaq Composite led gains, rising 0.66 per cent.
Here is a list of stocks that will be in focus today, May 16:
Q4FY23 earnings today
Bharti Airtel, LIC Housing Finance, Max Healthcare Institute, Bank of Baroda, Indian Oil Corporation, Jindal Steel & Power, JK Paper, Creditaccess Grameen, Alicon Castalloy, Amber Enterprises India, Aurionpro Solutions, Automotive Axles, Chemplast Sanmar, EIH Associated Hotels, Excel Industries, Granules India, Indo Rama Synthetics (India), Jubilant Ingrevia, Kajaria Ceramics, Kaynes Technology India, Metropolis Healthcare, Morepen Laboratories, MPS, Mukand, Navneet Education, Oberoi Realty, Paras Defence And Space Technologies, Prakash Industries, Redington, Safari Industries (India), Shanti Educational Initiatives, Sirca Paints India, Siyaram Silk Mills, Triveni Turbine, TV Today Network, V-Mart Retail.
March quarter results reaction
Suryoday Small Finance Bank: It posted a net profit of Rs 38.9 crore in fourth quarter ended March 2023 (Q4FY23) as against a net loss of Rs 48.1 crore in Q4FY22. The lender’s net interest income rose by 43.5 per cent year-on-year to Rs 210 crore, while other income rose by 69.5 per cent YoY to Rs 33.92 crore.
PVR Inox: Multiplex firm PVR Inox Ltd, on Monday, reported a widening in consolidated net loss at Rs 333 crore for the March quarter. The company reported a net loss of Rs 105 crore a year ago. The company’s consolidated total revenue from operation rose by 113 per cent to Rs 1,143 crore for the March quarter as compared to Rs 536 crore in the year-ago period.
Berger Paints: The company, on Monday, posted a consolidated net profit of Rs 186 crore for the March quarter, down 15 per cent from Rs 221 crore posted a year ago. The company’s consolidated revenue from operation rose by 11.7 per cent YoY to Rs 2,444 crore.
Pfizer: Drug firm Pfizer, on Monday, posted a consolidated net profit of Rs 130 crore for the March quarter, higher by 3 per cent YoY. Total income increased to Rs 604 crore as compared with Rs 567 crore in the year-ago period.
Karur Vysya Bank: Karur Vysya Bank, on Monday, posted a 59 per cent rise in net profit at Rs 338 crore for Q4FY23, compared to Rs 213 crore during the same time in FY22. The bank’s gross non-performing assets (NPA) in Q4 FY23 declined to 2.27 per cent (Rs 1,458 crore) as compared to 6.03 per cent (Rs 3,431 crore) a year ago.
News reactions
Reliance Industries, ONGC: The government has cut windfall tax on petroleum crude to zero from Rs 4,100 per tonne with effect from May 16, according to a government notification. The windfall tax on petrol, diesel and aviation turbine fuel (ATF) was left unchanged at zero.
HDFC: Mortgage lender HDFC will raise up to Rs 8,000 crore by issuing bonds on a private placement basis to shore up its resources. The unsecured redeemable non-convertible debentures (NCDs) issue will have a base size of Rs 3,000 crore with an option to retain over-subscription of up to Rs 5,000 crore.
HCL Technologies: The information technology company has expanded its long-standing partnership with SAP. As part of the expanded collaboration, HCLTech has become a customer of and a global strategic service partner for SAP SuccessFactors Human Experience Management Suite (SAP SuccessFactors HXM Suite).
Adani Enterprises: The Ministry of Finance, on Monday, differed with market regulator Sebi over Adani-Hindenburg row, and said it stands by its reply to Parliament in July 2021. Government had then stated that Securities and Exchange Board of India was investigating some Adani Group companies.
Wipro: It has announced that its FullStride Cloud Studio has partnered with Google Cloud’s Rapid Migration Program (RaMP) to help clients accelerate their journey to the cloud and pursue a migration strategy anchored in business outcomes.
Indiabulls Housing Finance: The company’s Board of Directors will meet on May 22 to consider issuance of secured and/or unsecured bonds, in one or more tranches to raise funds. It will also consider and approve audited financial results of the company for the quarter and financial year ended March 31, 2023.
Ultratech Cement: Ultratech Nathdwara Cement, the company’s wholly owned subsidiary commissioned a brownfield cement facility with annual capacity of 0.8 million tonnes in Neem Ka Thana, Rajasthan. The company’s total grey cement manufacturing capacity now stands at 129.95 million tonnes per annum.
NIIT: The company bought remaining 10 per cent stake in RPS Consulting for a fixed consideration of Rs 15 crore, and a performance based earnout consideration of up to Rs 3.71 crore, payable over the next two years. NIIT now owns 100 per cent stake in RPS Consulting.
Banswara Syntex: The Board has approved Kavita Gandhi as a Chief Financial Officer of the Company.
Jay Shree Tea: The Board of Director is scheduled to meet on May 23 to consider and approve financial results for Q4FY23, and scheme of arrangement, for demerger of Sholayar/Kallyar estates to a 100 per cent subsidiary Bidhannagar Tea Co. Private Ltd.
Somany Ceramics: The Board will meet of May 23 to consider issuance of non-convertible debentures (NCDs)/Bonds/other similar instruments on Private Placement basis.
NTPC: The National Thermal Power Corporation (NTPC) Ltd will begin a feasibility study for a 130-MW floating solar power plant on Dumbur Lake in Tripura’s Gomati district.
Stocks in F&O ban: BHEL, Delta Corp, GNFC, Punjab National Bank
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The Reserve Bank of India has allowed HDFC Bank Ltd and (HDFC) selective regulatory relief to smooth out the merger between the two organisations, set to conclude by July this year.
The central bank has permitted the bank to meet priority sector lending requirements in a staggered fashion over three years, HDFC Bank said in an exchange notification on Friday.
These requirements, which include lending to weaker segments of the economy, are linked to an organisation’s loan book.
In the first year after the merger, the combined entity will need to include one-third of HDFC’s loan book to calculate the amount of priority sector lending required.
Priority sector lending on the remaining part of the loan book would need to be met over the next two years, HDFC Bank said in the statement.
However, immediately after the merger, the combined entity, which will be called HDFC Bank, will need to comply with requirements to hold a certain level of cash reserve ratio, statutory liquidity ratio and liquidity coverage ratio on the entire merged balance sheet.
Earlier this week, Reuters reported that the bank and the housing financier had raised adequate liquidity to meet these requirements from the start.
Investments and associates of HDFC will be allowed to continue as investments of the combined HDFC Bank although the bank will need to exit a few select ventures over time.
However, the RBI said that before the merger closes, HDFC Bank or HDFC can increase their shareholding to more than 50% in HDFC Life Insurance Co Ltd and HDFC ERGO General Insurance.
But HDFC Bank has two years to both exit HDFC’s investment in HDFC Education and Development Services and reduce its stake in HDFC Credila Financial Services to 10%.
As per norms applicable to the banks, HDFC Bank will have to transition all HDFC’s retail and small business borrowers to an external benchmark, like the repo rate, within six months of the merger.
Housing finance companies have greater flexibility than banks in providing loans against shares. The RBI has allowed HDFC Bank to allow existing loans against shares within the HDFC portfolio to continue until maturity, the notification said.
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This year, eight IT companies have featured in the top 10 list of ‘India’s Best Workplaces for Women 2022’. The list has been released on the basis of a survey conducted by the Great Place to Work.
The top 10 companies for women in the country are Accenture Solutions Pvt. Ltd., Cisco Systems India Pvt. Ltd., Cisco Systems India Pvt. Ltd., H & R Block (India) Pvt. Ltd., HP, Pitney Bowes India Pvt. Ltd., Salesforce, Synchrony International Services Pvt. Ltd., Thoughtworks and VOIS.
Out of the aforementioned companies, only Ford Motor Pvt. Ltd. and Synchrony International Services Pvt. Ltd. are non-IT companies.
In addition to that, companies such as HDFC Life Insurance Company, Flipkart Internet Pvt. Ltd., PwC, Myntra Designs Pvt. Ltd., and more featured in the top 50 list. Others such as Canara HSBC Life Insurance Company Limited, DBS Bank Ltd., India, Ericsson India Global Services, IDP Education India Pvt. Ltd., Mastercard Incorporated, Shiv Nadar School, Wipro Ltd. and many others featured in the top 100 list.
Great Place to Work is the global authority on building, sustaining and recognising high-trust, high-performance culture at workplaces. They conduct surveys every year to highlight which company provides the best working environment for its employee.
This year, Great Place to Work India assessed 1,122 organisations where women employees made up at least 10 per cent of the workforce and provided at least 70 per cent positive feedback on the Trust Index assessment. On the basis of that, a list of the top 100 companies was prepared.
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HDFC’s second quarter net profit has seen decent rise
Housing Development Finance Corporation (HDFC) has reported a 32 per cent increase in its net profit for period ending September 30, 2021 at Rs 3,780 crore. It was Rs 2,870 crore during the corresponding period of last year.
The profit for the mortgage lender rose mainly due to soaring dividend.
The dividend income for the second quarter was Rs 1,171 crore, up by a huge 263 per cent over the corresponding period of last year.
HDFC received the dividend income from holdings in its subsidiaries including HDFC Bank, HDFC Life Insurance and HDFC Asset Management Company, its vice chairman and CEO Keki Mistry said.
The company’s revenue from operations rose to Rs 12,216 crore in the second quarter, up by 4 per cent compared to the corresponding period of last year.
India’s rising pace of vaccinations against Covid-19 and an improvement in the labour market has boosted consumer demand and helped lenders in improving their retail portfolio.
However, HDFC’s interest income contracted 2.3 per cent from a year ago period, even as demand for home loans improved.
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HDFC, Titan, Bajaj Finance and Tech Mahindra have gained 1-2 per cent each on the BSE
The domestic stock markets have opened in the positive, post the downturn witnessed in the past three sessions, due to buying interest across the board. At 9:18 am, the BSE Sensex is trading at 61,202, higher by 280 points or 0.43 per cent and the NSE Nifty is at 18,248, up 74 points or 0.41 per cent. The broader markets are also trading in the positive, with the BSE Midcap index and BSE Smallcap index gaining 0.4 per cent each.
Asia-Pacific markets mostly rose in Friday morning trading as shares of China Evergrande Group surged in Hong Kong following media reports that the embattled developer is set to pay off a coupon payment on a dollar-denominated bond. The Nikkei 225 rose 0.82 per cent, Topix index gained 0.52 per cent and South Korea’s Kospi advanced 0.05 per cent.
Global stock indexes mostly climbed and the S&P 500 posted a record closing high on Thursday, helped by gains in consumer discretionary and technology shares. The S&P 500 gained 0.30 per cent and Nasdaq Composite added 0.62 per cent. However, the Dow Jones fell 0.02 per cent.
On the earnings front, Reliance Industries will announce its September quarter results later in the day. HDFC Life Insurance, Yes Bank, Federal Bank and Hindustan Zinc will also declare their Q2 numbers today. And ICICI Bank will announce its quarterly earnings on Saturday.
On the stock-specific front, HDFC, Titan, Bajaj Finance and Tech Mahindra have gained 1-2 per cent each on the BSE. Bajaj Auto, HDFC Bank and Bharti Airtel are the other significant gainers in the BSE pack. And index heavyweight Reliance Industries has edged higher b 0.1 per cent ahead of its results scheduled later in the day.
On the other hand, Axis Paints has extended its previous day’s losses by another 1 per cent to op the losers list on the BSE. NTPC, Nestle and ICICI Bank are the other losers.
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