Everything about the HDFC Limited and HDFC Bank merge

HDFC BANK and HDFC Ltd have announced their merger. This merger will be one of the most significant mergers in the history of the financial sector and can make the company the third most valuable in the country. In the announcement’s wake, the share prices of these two entities increased by over 7 percent for a few trading hours.

The merger between HDFC Bank and HDFC Limited may prove to be a win-win situation for all parties in the face of escalating regulatory reforms and advancements.

Let’s dig deeper into HDFC Bank and HDFC Limited, Why they merged, their benefits, and how they will impact the shareholder.

But, First, let’s discuss details about “HDFC Limited” and “HDFC Bank”.

HDFC Bank

HDFC Bank is one of India’s central private banks, having been one of the first to gain the Reserve Bank of India (RBI). In 1994, the bank became a private sector bank. Wholesale and retail customers can make use of the bank’s extensive commercial and transactional banking services, as well as treasury solutions.

Currently, the bank has 6,342 branches and serves over 3,000 cities and towns, with a client base of 68 million. The bank has almost half of its components in semi-urban and rural regions.

HDFC Limited

Founded in 1997, HDFC Limited is India’s first specialist mortgage firm. It has evolved into a financial conglomerate with a broader range of interests than only mortgages.

It is now India’s most prominent home finance provider to low- and middle-income people as part of the government’s affordable housing programs. In the housing business, HDFC has the scale and strong underwriting knowledge.

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What are the Key Takeaways of this Merger?

Following are the key insights of the mega-deal between two companies that rank among India’s most valuable companies.

The merger might transfer HDFC Ltd’s subsidiaries and partners to HDFC Bank.
In the merger’s wake, it will reduce HDFC Bank’s exposure to unsecured loans.
HDFC Ltd would cease to exist as a publicly listed entity company.
Public shareholders will own 100% of HDFC Bank, while existing HDFC Limited shareholders own 41% of HDFC Bank.
The HDFC Bank will issue equity shares to HDFC Limited shareholders on the record date.

What is the Significance of this Merger?

The merger might minimize HDFC Bank’s exposure to unsecured loans while strengthening its capital base.

Therefore, both HDFC and HDFC Bank would get profit from this. The HDFC Bank stockholders would own 100 percent of HDFC Limited, and stock prices have already benefited. Hence, both corporations are likely to boost their earnings.

What are the Reasons Behind the Merger?

In the coming decade, private sector banks in India will require the size to service the economy’s latent credit demand. As a result, the banking sector is on the edge of consolidation. In some instances, it might be a merger of banks and NBFCs (Non-Banking Financial Companies) with complimentary credit profiles.

The merger of HDFC Ltd. and HDFC Bank has been expected for a long time since it would provide both organizations with lower-cost capital and franchise. Therefore, the merger is projected to be a long-term win-win situation for both companies’ stockholders.

What are the Benefits of the Merger For HDFC Limited?

Due to the merger, HDFC will benefit most from access to well-diversified low-cost funding and the broad customer base of HDFC Bank Ltd.

What are the Benefits of the Merger For HDFC Bank?

This merger will lead HDFC Bank to expand its home credit portfolio. However, the home lending market is during a robust upswing, which is a positive for the real estate industry. It’s a safe, secure asset type that pays off well when considering risk. Hence, the merger will improve the balance sheet of the amalgamated business, allowing it to underwrite large-ticket loans.

How are the Shareholders Going to Gain Benefits From the Merger?

This merger seems to have short-term and long-term beneficial conditions for all the shareholders. They will benefit as the stock prices rise and businesses will grow more successfully. Hence, the HDFC shareholders will get HDFC Bank shares for their 25 HDFC shares. The merger will cause a total of 42 HDFC Bank shares for every 25 HDFC shares held.

Final Note

The merger might take place during the second or third quarter of FY24. It will benefit both entities’ stakeholders, including customers, employees, and shareholders. Hence by merging these two entities, the government will pursue its position of “housing for all.”

However, there will be substantial regulatory costs for both companies to bear after the merger. So you must make an investment decision based on your diligence instead of solely on this news.

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