HDFC, HDFC Bank shares soar post merger announcement: Highlights

HDFC merger: The shares of both HDFC Bank and HDFC Ltd soared more than 10% after the announcement of a mega merger. Here are the major highlights. 

Summary

HDFC merger news: Merger Process

• The merger between the two entities will be a 2-step process. 
• In the first step: HDFC Investments Ltd. and HDFC Holdings Ltd., wholly owned subsidiaries of HDFC Ltd., will be merged with and into HDFC Ltd
• In Step 2: HDFC Ltd. will be merged with and into HDFC Bank.

HDFC merger with HDFC Bank: Share ratio

• As per the filing, for every 25 shares of HDFC Ltd, the shareholders will get 42 shares of HDFC Bank. Shareholders having lesser HDFC Ltd shares, the amount will be credited back to them. 
• For example, if you hold 30 HDFC Ltd shares, you will receive 42 HDFC Bank shares against 25 HDFC Ltd shares. The value of 5 HDFC shares will be credited to your account.
• The market value of the merged entity will be Rs 12.8 lakh crore based on the market capitalization of the two entities as of 1 April 2022.
• As of March 31, HDFC Bank's weight on the index was 8.4%, while that of HDFC was 5.66%. The merger will create the biggest stock in terms of weight in the Nifty50 index, easily surpassing Reliance Industries’ current weight of 11.9%.

HDFC merger: Impact on key metrics

(Data as on Dec 31, 2021; Source: Company Presentation)

HDFC Ltd merger with HDFC Bank: The Rationale behind merger

• HDFC Bank and HDFC merger will create a financial sector behemoth with more than Rs 25 lakh crore in assets.
• The merger should result in better return ratios for HDFC Bank as it will reduce its proportion of exposure to unsecured loans and also bolster its capital base. 
• HDFC is a leader in housing finance, while HDFC Bank has a much larger scale and distribution. The merger will enable the group to leverage these synergies.
• The combined business would benefit from increased scale, comprehensive product offering and balance sheet resiliency.
• This merger will make HDFC Bank a large lender by global standards. It will make more room for FII holding in HDFC Bank. There could be a 7-8% increase in foreign holding in the combined entity after the merger.
• The combined balance sheet will be a whopping Rs 17.87 lakh crore and with Rs 3.3 lakh crore Net Worth Enabling larger underwriting at scale.

HDFC merger: Brokerage radar

As the merger was announced this morning, there have been some early views from analysts so far. In the days to come, we will get a more detailed view of the benefits from the nerger. 

Emkay Global

• Emkay Global noted that the merger will be beneficial for HDFC Ltd,  as the mortgage business leverage will go up leading to better return on equity. 
• The bank will benefit in terms of balance sheet size/market share but will be margin dilutive given higher share of mortgage business. Risk adjusted margins will still be positive.
• This merger will pave the way for holding structure norms from the RBI as NBFC owning banks was one of the hurdles. As per the norms, the non-lending business will have to be outside the bank, under the holding company.