HDFC Ltd and HDFC Bank decided to merge on July 1, 2023, thus creating a mega entity. The market capitalization of this mega entity would be Rs 14.37 lakh crore.
The merger will benefit both customers and shareholders.
“All employees under 60 years of age will be absorbed and salaries will not be reduced. HDFC Bank will need our people because they have no knowledge of mortgages,” said Deepak Parekh, chairman of HDFC.
What could be the reasons behind this merger? Let’s find out.
Reasons behind the merger
Three main factors have contributed to the two twin companies opting for the merger. The prevailing low interest rate has made the environment for such a move quite conducive.
Additionally, the RBI has also reduced the CRR and SLR requirements from 27 per cent to 22 per cent. Furthermore, the high liquidity of the system is also one of the contributing factors.
According to one source, an additional factor is also present. The closure of the management of HDFC Ltd is also one of the factors. It was then that the question of succession arose. Therefore, it was concluded that the merger of HDFC Ltd with HDFC Bank will bring the most optimal synergy advantages.
How will HDFC benefit from the merger?
The merger will prove advantageous for HDFC in multiple ways. Since HDFC’s business is not that profitable, the company can improve its product penetration. In addition, financing costs can also be reduced thanks to this merger.
It cannot be missed that HDFC will earn an unparalleled benefit through the mortgage portfolio, giving it a quantum leap in distribution to rural or semi-urban areas with a substantial possibility of cross-selling banking products to persistent customers.
According to some analysts, the combined entity created from the merger will extract huge synergy benefits that will sit well with all shareholders and stakeholders.
However, the merged entity will also see some cost synergies; It is not easy to see how the merger alone will help the merged entity improve its market share.
Digital initiatives have already worried HDFC Bank. Additionally, many of its retail banking parts are actually under pressure from fintech companies. HDFC is bearing the brunt of increasing pressure from public sector banks in the mortgage business. But management lacks the means to combat short-term challenges and stay on top of everyone. One more advantage of the merger between HDFC Ltd. and HDFC Bank is that the cost of borrowing will eventually come down for HDFC. In such a situation, the huge entity resulting from the merger will gain in terms of cost efficiency. It also increases shareholder value.
In terms of shareholding, as part of the merger, 42 shares of HDFC Bank will be given for every 25 shares of HDFC Ltd.
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Source: ptivs2.edu.vn