HDFC and HDFC Bank fell sharply for the third straight day after the announcement of merger deals. HDFC twins have succumbed to a bout of profit booking, HDFC fell 1.82 per cent to Rs 2490.25. HDFC Bank was trading 1.06 per cent down at Rs 1534.35. The share price of HDFC Bank and HDFC had surged by around 10 per cent on Monday shortly after the merger deals were announced. However, in the last three days, these stocks have lost a major part of the gains made on the day when merger deals were announced.
“Considering there are a lot of subsidiaries that need to be merged, there could be some regulatory overhang, particularly in the insurance business where the central bank is not very comfortable with banks increasing their stake,” said an analyst at a domestic brokerage house.
HDFC Bank on Monday said its board has approved the amalgamation of HDFC Investments and HDFC Holdings with HDFC and that of HDFC into HDFC Bank. The combined entity would create a new financial sector behemoth in India and following the surge in share price on Monday, the market capitalization of the two had surpassed that of TCS.
HDFC Bank said the proposed transaction, will enable HDFC Bank to build its housing loan portfolio and enhance its existing customer base. The private lender said the proposed transaction is based on leveraging the significant complementarities that exist amongst the parties.
“The proposed transaction would create meaningful value for various stakeholders including respective shareholders, customers, employees, as the combined business would benefit from increased scale, comprehensive product offering, balance sheet resiliency and the ability to drive synergies across revenue opportunities, operating efficiencies and underwriting efficiencies, amongst others,” it said
HDFC has total assets of Rs 6,23,420.03 crore, turnover of Rs 35,681.74 crore and net worth of Rs 1,15,400.48 crore as on December 31, 2021. HDFC Bank, on the other hand, has total assets of Rs 19,38,285.95 crore, turnover (includes other income) of Rs 1,16,177.23 crore for the nine months ended December 31, 2021, and a net worth of Rs 2,23,394.00 crore, as on December 31, 2021.
HDFC Twins Merger Gets Thumbs Up From Brokerages
Jyoti Roy, DVP- Equity Strategist, Angel One Ltd., “The merger between HDFC and HDFC Bank is a positive development for the HDFC group. The deal is EPS and BV accretive by 4% and 8% respectively for HDFC Bank on a pro forma basis and is therefore value accretive for existing shareholders of HDFC bank. The merger is positive for the HDFC group as it will mitigate single product risk for HDFC Ltd. and also provide it access to low-cost CASA deposits. Moreover, it will allow both entities significant scope to cross-sell their products to each other’s customers. While additional prudential requirements like CRR/SLR and PSLC would prove to be a drag on margins for HDFC Ltd. we believe that access to low-cost CASA deposits will offset most of the drag on margins. Post the merger announcement we maintain our BUY rating on HDFC Bank with a target of Rs. 1,859.”
The proposed merger benefits both HDFC Bank and HDFC, while it would be EPS (earnings per share)-accretive in the first full year (FY25), CNBC-TV18 quoted Morgan Stanley as saying.
RoE (return on equity) falls in the near term given capital accretion, while loan growth pick-up would imply pre-merger RoE by FY26, it added.
Analysts at Prabhudas Lilladher said, while the merger would seem attractive purely from a scale perspective we need to factor in some key variables. Firstly, the merged entity would need to adhere to CRR/SLR and PSLC requirements which would be a slight drag on the margins. Secondly, HDFC Bank may not underwrite a chunk of developer loans that HDFC used to onboard which could be countered by addition of below-prime housing customer loans. Hence overall yields might compress. This would be offset by lower cost of funds owing to the bank’s access to CASA deposits.
On an operating level, branches in similar locations might be merged which could save on costs although for branches not present in common locations, transition costs would be incurred. Hence prima facie it seems that RoE for HDFC Bank could drop from current levels, immediately following the merger, although the merger would be positive from a scale and cross-sell standpoint. Rolling forward to FY24ABV we maintain multiple at 3.6x but raise target price to 2,000. Maintain Buy.
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