HDFC Limited announced that its board has approved a composite scheme of amalgamation, for the merger of it into and with HDFC Limited into HDFC Bank and their respective shareholders and creditors. HDFC Bank, which is India’s largest private sector bank has a large base of over 6.8 Cr customers.
The main reasons for merger listed by HDFC Bank are:
1. Building a housing loan portfolio in banking platform
2. Access to low-cost funds
3. Creating a large balance sheet of 25.61 Lakh Cr
4. Reduction in unsecured loans
5. Take advantage of the huge cross selling opportunity
The existing shareholders of HDFC will get shares in HDFC Bank- every 25 shares held in HDFC will fetch 42 shares in HDFC Bank
However, some investors have the following concerns:
1. There is a concern among investors regarding regulations on other HDFC subsidiaries like HDFC Life and others. The merger may weaken the subsidiary. For instance, they may have to sell some shares. So, the uncertainty remains whether HDFC will be able to scale up its subsidiaries.
2.The ability to maintain SLR: Currently, HDFC needs to hold a SLR (Statutory Liquidity Ratio) at 13% of public deposits, which post-merger will rise to 18% of net demand and time liabilities (NDTL). There are concerns related to the SLR requirement and the extent to which the new entity will be able to maintain the same.
3. The need to hold CRR (Cash Reserve Ratio). HDFC did not have any cash reserve ratio previously, and thus, against nil CRR balance in HDFC, the merged entity would be required to hold CRR at 4%. Higher mandatory reserve ratio requirements would push up the funding costs.
4. Sceptical on how the new entity will be able to build the Priority Sector Lending (PSL) against the portfolio and at what cost. Moreover, the C/I (Cash-to-Income) ratio of HDFC Ltd is around 8%, while that of HDFC Bank is around 37%. For the combined entity, the C/I ratio is likely to decline to around 32-34%,
5. Investors fear that the combined entity would be too big for mutual funds. Since they may cross the threshold of 10% in many mutual fund schemes, chances are that these funds may be selling these stocks. While the deal will still take around 18 months to complete, investors are already exiting in anticipation
What are your views on this Mega Merger?