After concluding a merger, a homegrown Indian corporation, HDFC, ranks among the world’s most valuable banks for the first time, giving fresh competition to the major American and Chinese lenders currently occupying the coveted top slots.
The Competition Commission of India (CCI) approved the merger in June and approved the proposed combination involving the acquisition of the additional shareholding of HDFC Life Insurance Company Limited by Housing Development Finance Corporation Limited. According to the reports, the merger will establish a lender that ranks fourth in equity market capitalization, trailing JPMorgan Chase & Co., Industrial and Commercial Bank of China Ltd., and Bank of America Corp.
The merger is expected to take effect on July 1, and July 13 as the record date. This new HDFC Bank entity would have roughly over 120 million customers, which is more than the population of Germany. It will also expand its branch network to nearly 8,300 locations and will have a total workforce of more than 177,000 employees.
On this merger, HDFC Bank MD and CEO Sashidhar Jagdishan said, “This is a defining event in our journey, and I’m confident that our combined strength will enable us to create a holistic ecosystem of financial services. We’re truly happy to welcome the talented team of HDFC Ltd into the HDFC Bank family”.
HDFC has surpassed banks such as HSBC Holdings Plc and Citigroup Inc. As of June 22, this merger has also left behind HDFC’s Indian counterparts, State Bank of India and ICICI Bank, which had market capitalizations of approximately 62 billion dollars and 79 billion dollars, respectively.
While talking to media, the head of financial services research for India at Macquarie Group Ltd.’s brokerage unit, Suresh Ganapathy, states, “Worldwide there are very few banks, which can at this scale and size, still aspire to double over a period of four years”. He stated that the HDFC bank plans to grow at a rate of 18% to 20%, that there is excellent visibility in earnings growth, and that they are also planning to double their branch count over the next four years. He added, “HDFC Bank will remain a pretty formidable institution”.
Ganapathy believes that stock’s performance will be determined by the loan book growth at 18% to 20% and a 2% return on assets. He said, “Management is confident of sustaining 2% return on assets and possibly beyond that level even post-merger and also deliver strong loan growth. If they can walk the talk, the stock will re-rate”.
HDFC Bank, which counts JPMorgan as one of its top investors, enjoys high investor trust. Bank’s contingent convertible bonds surpassed its global peers, which are the riskiest type of debt that can convert to stock if a lender runs into difficulties.
HDFC Bank has historically outpaced its counterparts in terms of deposit growth, and the merger provides another opportunity to expand its deposit base by leveraging the mortgage lender’s current customers. Approximately 70% of the customers do not have accounts with the bank. Last month, the bank’s retail chief Arvind Kapil stated that he intends to convince these customers to open a savings account in their bank.
According to a presentation given when the merger was announced last year, the lender can offer its consumers in-house home loan solutions because only 2% of them had a mortgage product from HDFC Ltd.
During the merger, the bank’s chief executive Sashi Jagdishan said, “The lifetime value of a customer’s relationship with that bank just enhances when you start to put a mortgage into his product offering”.
This historic merger was announced last year on April 4. As per the terms of the deal, shareholders of HDFC Ltd will receive 42 shares of HDFC Bank for 25 shares held. Existing shareholders of HDFC Ltd will own 41 per cent of HDFC Bank.
“The share exchange ratio for the amalgamation of the Corporation with and into HDFC Bank shall be 42 equity shares (credited as fully paid up) of face value of Re 1 (Rupee One) each of HDFC Bank for every 25 fully paid up equity shares of face value of Rs 2 (Rupees Two) each of the Corporation,” HDFC said in a regulatory filing to the stock exchanges.
Post the merger, HDFC Bank will be 100 per cent owned by public shareholders, and existing shareholders of HDFC Limited will own 41 per cent of HDFC Bank.
