What about the merger? HDFC-HDFC Bank
The HDFC-HDFC Bank merger, described by Deepak Parekh, chairman of HDFC, as a merger of equals, produces a banking giant with a market capitalization of Rs 14 lakh crore. It has arrived at the appropriate time, according to Parekh, because recent Reserve Bank of India (RBI) restrictions have reduced the operational arbitrage for non-bank lenders. Here are some of the questions that Deepak Parekh and HDFC's Keki Mistry answered.
HDFC is India's largest private sector bank and is ideally positioned to benefit from the country's economic revival. HDFC Bank released its third-quarter results earlier this year, with standalone net income jumping 12.1 percent year on year from INR 23,760.8 Cr to INR 26,670 Cr, thanks to overall advance growth of 16.5 percent and deposit growth of 13.8 percent. Net interest income climbed by 13% on a year-over-year basis. The net interest margin remained constant at 4.1 percent. Other income climbed by 9.9% from INR 7,443.2 crores to INR 8,183.6 crores in the same period last year, accounting for around 30.7 percent of net sales. Fees and commissions accounted for two-thirds of other income, up 2% year over year, owing to a 17% increase in costs (excluding payment products), somewhat offset by lower fees on card loan products, cash advances, and overdraft fees, reflecting the bank's conservative approach to card-based lending. Operating expenses rose 14.9 percent year over year, attributable to a 20% increase in employee-related costs and a 12.6 percent increase in other operating costs. Increased revenue and decreased provisioning somewhat offset an increase in operating costs, resulting in a net profit of INR 10,342.2 crores, up 18.1 percent.
At a meeting on April 4, 2022, the board of directors of HDFC Bank Limited adopted a composite scheme to merge HDFC Investments Limited and HDFC Holdings Limited into Housing Development Finance Corporation Limited ("HDFC Limited").
HDFC Limited shareholders would receive 42 HDFC Bank shares in exchange for 25 HDFC Limited shares. Cross-selling to a large and growing customer base, leveraging the power of distribution in urban, semi-urban, and rural geographies, multi-decade mortgage underwriting expertise across credit cycles, underwriting of larger ticket size loans, including infrastructure loans, and last but not least, this merger will make a lot of sense for customers of both organizations who will have more access points a The transaction is scheduled to close in 18 months, subject to regulatory approvals. Existing HDFC Limited shareholders will own 41% of HDFC Bank after the merger. With a considerable weighting in India's benchmark NSE Nifty Index, the amalgamated organization may become the country's third-largest listed corporation in terms of market value.
As of December 31, 2021, HDFC Bank's total deposits were INR 14,45,918 Cr, up 13.8 percent from the previous year. Deposits in current and savings accounts (CASA) grew by 24.6 percent year over year. As of December 2021, CASA deposits account for 47% of total deposits. Total advances were INR 12,60,863 Cr as of December 2021, up 16 percent from the previous year. Advances expanded faster than deposits in the last three quarters, as seen in the figure below, indicating a pick-up in lending activity as the economy improves post-Covid. This is encouraging for the bank's future NIMs.
Merger synergies, accelerated loan growth as the Indian economy recovers, and momentum from digital initiatives and card expansion despite the RBI's limitation are among the factors that can fuel earnings growth in the coming years for the company. The stock price has risen after the RBI eased limits on digital initiatives and the combination of HDFC Ltd. and HDFC Bank was announced. With many medium-term catalysts and a reasonable price, we feel it is a smart play on India's secular development potential.