Why the merger, and what will be its impact?
The HDFC Ltd. and HDFC Bank merger is scheduled to occur in the next 18 months, subject to regulatory clearances and other standard closing conditions.
On April 4th, HDFC Bank and HDFC Ltd declared their intention to merge, paving the way for one of India's largest financial transactions.
HDFC Bank will be able to expand its housing loan portfolio and expand its client base as a result of the planned merger.
HDFC Limited, India's largest housing finance company with Rs 5.26 trillion in assets under management (AUM) and a market capitalization of Rs 4.44 trillion, will merge with HDFC Bank, India's largest private sector bank by assets with a market capitalization of Rs 8.35 trillion, according to the transaction structure.
Benefits of HDFC Ltd and HDFC Bank Merger
The news was clearly insufficient to establish the topic of rationality. Here, we'll go over the advantages that the bank will reap in the future, as well as why they're optimistic about a merger between the home loan and the bank of the same parent company. Let's look at how the benefits of merger that will benefit the company and investors.
1. Safety and Profitability
A merger can be quite useful, since it can greatly protect the resulting organization, ensuring safety and profitability. A merger allows existing shareholders to reorganize the entity's shares and create a better arrangement for the new organization.
2. Strong Entity
Another reason for this bank merger is that the combined resources of both companies and entities increase, making them stronger as a whole. Many organizations merge or amalgamate to expand into new markets and diversify their product portfolios, so increasing their profitability and profit-making capabilities. Another reason organizations desire to merge is to obtain assets from other businesses that would have taken a long time to acquire or start up on their own.
3. Taxes
Merging with another company can also save money on taxes by minimizing the tax obligation that each company generates. A merger can also be utilized to eliminate competition between two companies that operate in the same product area and have a competitive quality control department. Companies like this, by the way, can work toward the same profitability goal with more powerful arms and assets. This combination will also aid in the better planning and utilization of the financial resources available to both firms.
The HDFC merger is responsible for several of the above-mentioned advantages. In fact, in addition to the benefits listed above, this merger will have additional unspoken benefits, such as:
5. Benefits to Investor
More investors will stay invested in this joint venture as a result of the merger between the parent company and the banking division or arm. This bank merger will create synergy for both businesses and will aid international investors by providing more opportunities to invest in.
6. High EPS (Earning Per Share)
The bank's earnings per share (EPS) will also benefit from the merger or amalgamation. Earnings per share, or EPS, is a financial statistic used to evaluate a company. A company with a high earnings per share is deemed more investment desirable than one with low earnings per share in normal conditions.
7. Share Prices
Another short-term benefit of merger for both companies was that their stock prices soared on the stock exchange. On 6th April, the stock of HDFC bank closed at the 10 percent higher rate, which valued the private commercial bank at a valuation of 9.2 lakh crore. Whereas, the stock of HDFC which is the housing finance company increased by about 9.2 percent and landed the company with a valuation of almost 5 lakh crores.
Benefits of Merger to Two Entities
When it comes to the benefits that the merger brought to the two financial institutions, the transaction benefited HDFC Ltd more than HDFC Bank.
HDFC Ltd will get lots of new advantages. To begin with, the cost of funds will decrease because banks have lower costs of funds because they accept deposits from people like us.
The second advantage is that, as a result of the merger, they will be able to cross-sell products to clients, giving them a wider range of possibilities.
The majority of HDFC's customers are sold home loans. When they join the HDFC bank and work with the same relationship managers or branches, they can cross-sell all kinds of products to them, such as retail loans, personal loans, credit cards, and small business loans, giving clients a greater range of options.
While taking on HDFC Ltd's customers benefits them because they can cross-sell other then home loan to them, HDFC Bank will have to "take on the weight of high SLRs and CRRs, which will reduce their earnings a little."
What shareholders should know and Will ownership of shareholders change?
HDFC's stake in HDFC Bank will be wiped out following the merger, leaving the bank entirely held by public shareholders. HDFC Bank will be 41% owned by HDFC Limited's existing shareholders. The combined company will be worth roughly Rs 12.9 lakh billion in the market.
HDFC said that for every 25 shares of non-banking lender held, shareholders will receive 42 HDFC bank shares.
Key Highlights check:
HDFC Limited, India's largest housing finance company, has merged with HDFC Bank, India's largest private sector bank. Over the previous 45 years, HDFC has established one of the best product portfolios, delivered in a cost-effective and timely manner, establishing it as a leader in the housing finance industry
HDFC Bank would enable seamless distribution of home loans by using the bank's enormous customer network of over 68 million consumers to, among other things, accelerate credit development in the economy.
The goal of the company and bank merger is to build a huge balance sheet and net worth, allowing more credit to flow into the economy. It will also allow for the underwriting of large-ticket loans, such as infrastructure loans, which the country urgently needs.
Under the Government of India's affordable housing efforts, HDFC Limited is a key provider of home loans to the Low Income Group (LIG) and Middle Income Group (MIG) segments. Because of the low-cost finances available through HDFC Bank, this category's access to housing finance will improve even more.
Through its 6,342 branches, the Bank serves more than 3,000 cities/towns across the country, with over half of these branches located in semi-urban/rural areas. The proposed transaction will broaden the home loan offering by leveraging this distribution power, which is in line with the national goal of the Pradhan Mantri Awas Yojana, which aims to provide homes for all.