HDFC-HDFC Bank Merger effects on shareholders

In future, we could see more large NBFCs getting converted into banks.

What does the HDFC-HDFC Bank merger mean for shareholders

The amalgamation of HDFC Ltd. and HDFC Bank was announced at the beginning of the week and continues to dominate the financial pages of newspapers. The deal is being described as a ‘mega merger’ that is expected to create a banking heavyweight, not only in India but overseas too.

Analysts say the new company will be India’s third-largest company in terms of market capitalisation (Rs 14 lakh crore) and the eighth largest bank worldwide by the same yardstick. Within the country, its market share will be double that of ICICI Bank, its biggest competitor.

What this means is that the HDFC-HDFC Bank merger could go down as one of India's biggest deals in banking.

HDFC Bank’s loan book will also swell substantially post-amalgamation - to about Rs 18 trillion, a huge jump for both companies from their third quarter showings in the last financial year: Rs 12.69 trillion for HDFC Bank and Rs 5.26 trillion for HDFC Ltd. 

But the bank merger effect is set to be felt beyond the banking sector, impacting the broader markets in various ways. Let us examine how.

Also Read: Bank Or NBFC: Which Can Get You The Best Deal?

Share prices gain

The announcement of the HDFC-HDFC Bank merger on April 5 (Monday) had an immediate impact on the stock market, which saw a steep upsurge in the share prices of the two companies. During the day, HDFC Bank touched an intra-day of Rs 1656.6, going nearer the 52-week high of Rs 1725 per share.
However, it soon fell, and the downward trend continued over the next few days; a week after the announcement, HDFC was trading around midday at 1504 on Monday (April 11). 

Analysts seem to be waiting for more clarity, as seems to be reflected in wildly varying target price set for HDFC Bank, as given below:

  • Emkay Global: target price - Rs 2050, 'buy' rating; 
  • Nirmal Bang: target price - Rs 2151, 'buy' rating; 
  • Anand Rathi - target price of Rs 1923, 'buy' rating;
  • Kotak Securities - target price of Rs 1780, 'buy' rating;
  • Yes Securities - target price of Rs 1900, 'buy' rating.

Also Read: 5 Most Expensive Shares In The World

Shareholding pattern

After the merger, shareholders of HDFC Ltd. will receive 42 shares of HDFC Bank, each carrying a face value of one rupee, for 25 shares of HDFC Ltd. worth Rs 2 each; the exchange ratio will be 1:1.68. This will give them 41% ownership in the merged bank.

The mortgage business and loan servicing processes of HDFC will also come under HDFC Bank, which will boost its revenues, to the benefit of its shareholders.

Future of NBFCs

For finance companies such as HDFC Ltd., sourcing funds from the market or the banks can be expensive, but lending rates are much lower for banks, which makes borrowing cheaper for them. This is one of the main reasons behind the HDFC amalgamation in the first place.

Also Read: NBFCs And Banks: How Are They Different?

In the future, we could see more bank mergers in India as the competition checks out how the HDFC merger pans out. We could also see more NBFCs getting converted into banks, provided these proposals are ratified by the Reserve Bank of India (RBI). 

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