RBI approves the HDFC merger.

The merged entity would be twice as big as ICICI Bank, the country's second-largest private bank, and it will narrow the gap between HDFC Bank and market leader State Bank of India (SBI).

RBI Approves The HDFC Merger

On Monday, HDFC Bank announced that the Reserve Bank of India (RBI) had given its merger with Housing Development Finance Corporation the green light (HDFC). Once all necessary permits have been obtained, HDFC Bank will be fully owned by the public, with HDFC’s promoter ownership of 21% being wiped out.

The merged entity will be led by Sashidhar Jagdishan, who took over as MD and CEO of HDFC Bank in October 2020. The merger would be the biggest in Indian corporate history, establishing a financial giant that will rank among the top 10 most valuable banks in the world and have a market capitalization of $169 billion (the second-largest in India). In exchange for their 25 HDFC shares, shareholders will receive 42 HDFC Bank shares. The combined company would be twice as big as ICICI Bank, the country’s second-largest private bank, and it will close the gap between HDFC Bank and market leader State Bank of India (SBI).

Given that the new HDFC would have a book of close to Rs 18 trillion, which is double the size of ICICI Bank’s book, as well as the relatively extensive distribution franchise, the merger will cause a sharp increase in the industry competition. Top executives of the group acknowledge the synergies and claim there is very little overlap in the businesses, despite the Street’s concerns about how the transition would be managed and how margins would be impacted due to the legal obligations that would need to be maintained.

“The RoE is likely to dilute marginally given the differences in return ratios and there would be an impact due to regulatory requirements,” analysts had observed when the merger was first announced in early April.

In addition, they highlighted that loan growth on a much bigger book is likely going to be slower and probably going to be a lot more dependent on the economic conditions.

They noted that it would be difficult to produce loan growth that was clearly superior. Given that loan growth has been slowing down recently, the transaction would be seen favourably by HDFC Bank.

“…please note that HDFC Bank has received a letter dated July 04, 2022, from the Reserve Bank of India (“RBI”) whereby the RBI has accorded its ‘no objection’ for the Scheme, subject to certain conditions as mentioned therein,” the lender said in a communication to the stock exchanges.

The two stock exchanges approved the proposed merger last week. The merger is still pending clearance from a number of additional legislative and regulatory bodies, including the National Company Law Tribunal, the Competition Commission of India, other relevant agencies, and the respective shareholders and creditors of the two organisations.


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