HDFC Ltd and HDFC Bank have decided to merge on July 1, 2023, thereby creating a mega entity. The market capitalization of this mega entity would be Rs 14.37 lakh crore.
The merger is going to advantage both customers and shareholders.
“Every employee under the age of 60 will be absorbed and salaries will not be reduced. HDFC Bank will need our people because they don’t have knowledge of mortgages,” said Deepak Parekh, HDFC Chairman.
What may be the reasons behind this merger? Let's find out.
Reasons behind the merger
Three main factors have contributed to making the two twin companies go for the merger. The low-interest rate that is prevailing has made the environment for such a move quite supportive.
Plus, the CRR and SLR requirements have also been lowered by RBI from 27 percent to 22 percent. Additionally, the high liquidity in the system is also one of the contributing factors.
As per a source, an additional factor is also present. The shutdown of the leadership at HDFC Ltd is also one of the factors. That is when the question of succession arose. Thus, it was concluded that a merger of HDFC Ltd with HDFC Bank will be bringing the most optimum synergy advantages.
How will HDFC advantage of the merger?
The merger will prove to be advantageous for HDFC in multiple ways. Since the business of HDFC is not as profitable, the company can enhance its product penetration. Plus, funding costs too can go down due to this merger.
Not to miss, HDFC will be getting an unparalleled benefit via the mortgage portfolio, thereby giving it a quantum leap in distribution to areas that are rural or semi-urban with a substantial chance to cross-sell bank products to sticky customers.
As per a few analysts, the combined entity created out of the merger is going to extract huge synergy benefits which align well for all shareholders and stakeholders.
Some cost synergies, however, will also be seen by the merged entity, it is not easy to see how the merger is going to by itself aid the merged entity enhance its market share.
The digital initiatives have already been troubling the HDFC Bank. Plus, many of its retail banking parts are actually under pressure from the fintech companies. HDFC is bearing the brunt of enhanced pressure from the public sector banks in the mortgage business. But, the management lacks the wherewithal to combat the short-term challenges and come above 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 thus formed out of the merger is going to gain in matters of cost efficiencies. It is also value accretive for the shareholders.
Talking about shareholding, 42 shares of the HDFC Bank are going to be given for every 25 shares of the HDFC Ltd., as part of the merger.
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