HDFC deal worth Rs 3 lakh cr creates Indian lending giant

The deal is valued at Rs 3 lakh crore

India's top private lender HDFC Bank is buying its largest shareholder in the country's biggest ever deal, creating a financial services behemoth in Asia's No. 3 economy.

The bank’s decision to buy Housing Development Finance Corp, which issues mortgages to more than half the home buyers in the world’s second-most populous nation, comes at a time when Indians are showing a growing appetite for credit.

The deal is also in sync with a recommendation by the Reserve Bank of India. Following a 2018 crisis in the non-banking finance sector that shook India's financial system, the RBI issued guidelines in November allowing well-run large shadow lenders to be converted into banks.

Analysts gave a thumbs-up to the proposed deal, which pushed up the shares of both companies on Monday.

“For shareholders, this is far better than a buyback at higher prices. This megamerger will correct the recent underperformance of the HDFC twins,” said V K Vijayakumar, the chief investment strategist at Geojit Financial Services.

Also read: HDFC Limited to merge into HDFC Bank

HDFC Bank shares closed 10% higher at 1,656.45 on Monday, while HDFC Ltd rose 9.3% to close at 2,678.90 on the BSE benchmark Sensex.

“The HDFC twins are even now only attractively priced in a highly valued market. FPIs' strategy of sustained selling in HDFC twins has been proved to be a short-sighted decision,” he added.

The deal is expected to close within 18 months after getting regulatory approvals, HDFC Bank said in an exchange filing on Monday.

"The value of HDFC Ltd is $60 billion (Rs 4.5 lakh crore). If you strip off the portion of their holding in us, it comes to $40 billion (Rs 3 lakh crore) and that's the value of the deal," HDFC Bank CEO Sashidhar Jagdishan, who will head the combined company, told reporters at a press conference.

HDFC Ltd shareholders will receive 42 shares of the bank for 25 shares held, giving them ownership of 41% of HDFC Bank, which will become a full-fledged public company as the housing finance company's stake in the lender will be cancelled in the deal.

“The resulting larger balance sheet would allow underwriting of large ticket infrastructure loans, accelerate the pace of credit growth in the economy, boost affordable housing and increase the quantum of credit to the priority sector, including credit to the agriculture sector,” HDFC Limited Chairman Deepak Parekh said.

“The merger will help make the entity offer more compelling mortgages and strengthen us against competition,” Parekh said.

While the ICICI bank merger in 2001 created the third largest entity in the banking sector after HDFC Bank and the State Bank of India, this deal should not be compared with it, analysts told DH.

“The 2001 merger between ICICI Bank and Bank of Madura was a merger between banks. The merger of the mortgage lender with the bank has better synergies,” Geojit’s Vijayakumar said.

“HDFC will benefit from the low cost funds of HDFC Bank and the bank's large branch network. HDFC Bank will gain from the competence of the mortgage lender. The main benefit from the ICICI-Madura Bank merger was that ICICI Bank, which was not dominant in South India, got access to the large branch network of Madura Bank. This geographical synergy contributed substantially to the growth of ICICI Bank,” he added.

Others agreed.

Samir Bahl, the chief executive officer of investment banking at Anand Rathi Advisors, said the entities involved in the ICICI deal got together with the aim of consolidating their offerings under a banking platform to offer low-cost deposits and an opportunity to earn a fee-based income.

“On the other hand, the merger of HDFC with HDFC Bank provides an advantage through the mortgage portfolio providing it a quantum leap in distribution to semi-urban and rural areas with a huge opportunity to cross-sell bank products to a very, very sticky client base,” Bahl said.

(With agency inputs)

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