HDFC Bank creates Indian lending behemoth in $40 billion merger By Reuters

By Nupur Anand and Chris Thomas

MUMBAI (Reuters) -India’s largest private lender HDFC Bank and its biggest shareholder are merging in a $40 billion deal, the country’s biggest ever, creating a financial services titan to better tap rising demand for credit in the economy.

HDFC Bank’s deal with housing finance firm HDFC Ltd, which owns about 21% of the lender, will build on its 68 million customers and expand its home loan portfolio significantly while also opening up the scope for larger loans.

It will also help HDFC Bank shrink the gap with state-run lender and bigger rival State Bank of India while boosting competition in the home loan space as people step up purchases with pandemic woes receding.

“This is a long-awaited merger and will be beneficial for both the companies but particularly for HDFC Ltd that was competing with the likes of State Bank of India in a competitive home loan market, leading to pressure on margins due to disadvantages to its cost of funds,” said Asutosh Mishra, research analyst at Ashika Stock Broking.

Following a crisis at shadow lenders in 2018 that shook India’s financial system, the central bank issued guidelines in November 2021 allowing well-run large shadow lenders to be converted into banks. The HDFC group is the latest in India to take advantage of the new rules and undertake mergers of their companies.

HDFC Bank shares jumped as much as 14.4% after the announcement, giving the firm a market value of 9.54 trillion rupees ($126.34 billion), while HDFC Ltd surged 19.6% to a valuation of 5.31 trillion rupees ($70.32 billion).

Under the terms of the deal, shareholders of HDFC Ltd will receive 42 shares of the bank for 25 shares held. Existing shareholders of HDFC Ltd will own 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 value of HDFC Ltd is $60 billion. If you strip off the portion of their holding in us, it comes to $40 billion and that’s the value of the deal,” HDFC Bank CEO Sashidhar Jagdishan told reporters at a press conference.

At $40 billion, it will mark the largest banking sector M&A globally since April 2007, according to Refinitiv data.

BIGGER BALANCE SHEET

The combined company will have a bigger, $237 billion balance sheet which will allow it to underwrite larger ticket loans, including infrastructure loans. HDFC Bank is currently a largely retail-focussed bank.

The planned merger will expand HDFC Bank’s loan book by 40% and the combined company’s market value will rise to about $160 billion at current prices, Jefferies said in a note.

The companies expect the deal to be completed in the second or third quarter of the financial year starting in April 2023. Jagdishan will be the chief executive of the combined company.

“Over the last few years, various regulations for banks and NBFCs have been harmonised, thereby enabling the potential merger,” HDFC Ltd Chairman Deepak Parekh said, referring to shadow lenders also referred to as non-banking finance companies (NBFCs) in India.

J.P. Morgan, Goldman Sachs (NYSE:) and Citi were among financial advisers to HDFC Bank for the deal, while Credit Suisse (SIX:), Kotak Securities and Jefferies were among advisers to HDFC Ltd.

($1 = 75.5120 Indian rupees)