HDFC announced a merger with HDFC Bank on Monday, with a share merger ratio of 42 shares of HDFC Bank to 25 shares of HDFC. HDFC Bank will be able to expand its home loan portfolio and expand its existing customer base as a result of the proposed deal.

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Following the proposed merger, HDFC will hold a 41% stake in the merged entity. The merger is subject to clearance from the RBI and other regulatory bodies. HDFC has overall assets of Rs 6.23 lakh crore as of today, whereas HDFC Bank has assets worth Rs 19.38 lakh crore. The subsidiaries and associates of HDFC Ltd will shift to HDFC Bank.

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“The proposed transaction would create meaningful value for various stakeholders including respective shareholders, customers, employees, as the combined business would benefit from increased scale, comprehensive product offering, balance sheet resiliency, and the ability to drive synergies across revenue opportunities,” HDFC said in an exchange filing.

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The proposed merger will reduce HDFC Bank’s exposure to unsecured loans while simultaneously strengthening the capital base.

“HDFC and HDFC Bank merger will be beneficial for both the companies. With this, HDFC will merge into HDFC Bank and the shareholders of HDFC Bank will become 100% shareholders of HDFC. The two firms intend to combine their capabilities with the merger, combining HDFC’s domain competence in housing finance with HDFC Bank’s better scale and distribution, said Animesh Malviya, Banking Analyst at CapitalVia Global Research.

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“This will improve the amalgamated entity’s ability to cross-sell banking and housing finance products. We have seen a positive impact on the stock prices and we believe that it will help both companies to increase their profitability as they would be able to use each other’s strength to their advantage,” he added.

For HDFC, the biggest gain will be access to well-diversified low-cost funding and a huge customer base of HDFC Bank Ltd, explained Santosh Meena, Head of Research, Swastika Investmart. 

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“Earlier non-banking financial corporations used to enjoy regulatory arbitrage vis-à-vis banks, but the regulatory authorities have harmonized the same, thus making this merger necessary and creating a competitive advantage over its peersm+,” he said.

HDFC Bank will be able to expand its housing loan portfolio as a result of the proposed merger. The home loan market is on the verge of a robust upswing, with tailwinds for the real estate industry, and it offers a stable secured asset class with highly attractive risk-adjusted returns.

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This will boost the merging entity’s balance sheet size, allowing it to underwrite large ticket size loans.

“Overall this is a marriage made in heaven, creating increased scale, comprehensive product offering, balance sheet resiliency and the ability to drive synergies across revenue opportunities, operating efficiencies and underwriting efficiencies, hence benefiting stakeholders of both the companies,” said Meena.

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Shareholders will benefit as well since share prices will rise and companies will become more lucrative. Existing HDFC shareholders will get shares in HDFC Bank – for every 25 shares held in HDFC, 42 shares in HDFC Bank would be issued.

“The merger will provide the combined entity more efficiencies of scale and will bring down costs, thereby benefiting shareholders of both entities,” said Rishad Manekia, Founder, Kairos Capital.

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Following the merger, mortgages will be offered as a key product to HDFC Bank’s 68 million customers in a seamless way. HDFC has invested funds, cultivated skills, and established 445 branches across the country. These offices may be utilized to sell the whole HDFC and HDFC Bank product suite.