HDFC Bank - HDFC Ltd. merger explained | HDFC Bank and HDFC ltd merger ratio - YouTube

Hi, Today morning there is big news for the shareholders of HDFC Bank and HDFC Ltd.

The board of housing finance firm HDFC Ltd has approved the proposal to merge its subsidiaries and associates with HDFC Bank.

As per the announcements made by both companies, HDFC Ltd will be merged with HDFC Bank and one entity will be dissolved as HDFC Ltd.

Let us first understand the details of the merger very well.

As per the details of the merger, then the shareholders of HDFC Ltd will get 42 shares of HDFC Bank for every 25 shares they buy.

Post the merger the existing shareholders of HDFC Ltd will own 41% of HDFC Bank.

That is, after the proposed merger, HDFC Bank will be 100% owned by the public shareholder.

Further, the shares held by HDFC Ltd in HDFC Bank shall be extinguished.

HDFC Limited's subsidiaries and associates will shift to HDFC Bank.

These mergers are expected to be complete by the second or third quarter of FY24.

This is India's third-largest entity restriction in terms of HDFC Bank's market cap after the merger.

The merger is yet to be approved by RBI, SEBI, and shareholders.

After the news, the shares of both HDFC Bank and HDFC Ltd had increased by almost 15%.

Besides, HDFC Life and HDFC AMC stock prices also saw a rise of over 7.5%.

At present HDFC Ltd holds about 48% stake in HDFC Life and about 53% stake in HDFC AMC.

And after the merger, this stake will be transferred to HDFC Bank.

Let us now see what can be the benefits to these 2 companies from this merger.

HDFC Bank said this merger will create value for shareholders, customers, and employees.

In addition, for the combined business, it will be on account of increased sales, broader product offerings, and a strong balance sheet.

As per analysts' experience, this mega-merger could correct the recent underperformance in the stocks of these two companies.

According to experts, HDFC Ltd will benefit more from the merger as their business is less profitable compared to HDFC Bank's.

HDFC Ltd. will also benefit from HDFC Bank's wide distribution network which can be leveraged to increase its product penetration.

The two companies have the power to create different business synergies and cross-selling opportunities post-merger.

Apart from this, HDFC Bank will also be able to target the home loan segment which is generally longer-term loans.

In addition, post-merger HDFC Bank will benefit greatly from cross-selling products such as life insurance and asset management.

Former SBI Chairman Rajnish Kumar said that after the merger, HDFC Ltd's cost of borrowing will come down.

This can lead to an increase in the cost-efficiency of the combined unit.

After the advantage, now let's see what negative impact can this merger have on the business of 2 companies.

As per Analysts, HDFC Ltd books 80% of home loans with relatively low yields.

HDFC Ltd. is an NBFC but the guidelines applicable to banks on the assets of HDFC Ltd after its merger with HDFC Bank will also apply.

As per RBI guidelines, banks are required to have a minimum Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR).

Simply, commercial banks reserve a certain percentage of their total deposits in the form of cash, gold reserves, and government bonds.

Hence, post-merger costs like SLR and CRR will be applicable and may impact their profit margins.

Moreover, as per analysts, HDFC's net interest margin is around 3.6-3.7% when HDFC Bank's net interest margin is more than 4%.

In this case, the profitability of the combined entity may be impacted.

Apart from all, there is also a point of concern that in 2019, according to sources, the RBI has "informally" advised banks

to keep their stake in insurance companies up to a maximum of 30%.

And recently in 2021 also there were reports that RBI had informally told banks to keep their stake capped at 20% to the insurers.

So if RBI makes any such official announcements, then post-merger HDFC Bank may have to reduce its holding in HDFC Life.

With the merger news, one of the reasons why HDFC Bank's share price rose today is that

The company has recorded good numbers in the recent quarter.

HDFC Bank's advances grew by 20.9% year-on-year and 8.6% on a QoQ basis in the March-ended quarter.

The company's retail deposits grew by 18.5% on a year-on-year basis and around 6% on a QoQ basis.

HDFC Bank's CASA (Current Account and Savings Account) ratio also increased from 47.1% in the previous quarter to 48%.

So this was a small update related to the merger of HDFC Bank and HDFC Ltd.

As soon as we get any more important updates or developments related to the merger, we will again have a video for you soon.

I hope you liked this small update today.

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