Big banks getting bigger
Vishrut A.
Alumni- IMT Hyderabad | Management Trainee -O2C at G4S India | Tally Essentials Level 1 "A" grade | Tally Essentials Level 2 "A+" grade | Tally Essentials Level 3 certified
The Housing Development Finance Corporation (HDFC), a leading domestic lender for homebuyers in India, is poised to draw more attention than it already does, as a share in the Nifty, as a bank, and in the business world. The group announced a merger of its group holding company and the largest private-sector Indian bank, of which its existing shareholders will own 41% as they will be gaining 42 shares of HDFC Bank for 25 shares of HDFC.
Proposed in April 2022, the merger, slated to be concluded in July this year, will establish a combined entity worth Rs. 3.3 lakh crore, or USD 40 billion, with the combined asset value across classes being Rs. 17.87 lakh crore. Through the merger, HDFC Bank will reach a 33% share in its loan portfolio in home loans, in contrast to 11% currently.
Some of the purposes behind the merger are stated to be an initiative for riding the boom in home loans and consumer spending as middle-class burgeons in the third largest economy of Asia. The private lender has seen a 24.5% CAGR in its home loan growth, leading its management to forecast rising demand for home loans and mortgages—a lucrative opportunity for all lenders. The synergy of the merger will enable HDFC Bank to access home loan customers of HDFC, as 70% of them are not associated with HDFC Bank.
The upcoming HDFC Bank will become wholly owned by public entities in India. By capitalisation, the merged entity will be twice that of ICICI Bank and second alone to the State Bank of India (SBI) in India.
Twenty-one years ago, on 30 January 2002, the industry leader of the private banking sector in India at the time was ICICI Bank, and it merged with ICICI Inc. The merger also included ICICI Limited, ICICI Capital Services, and ICICI Personal Financial Services into ICICI Bank. The customer base of ICICI Ltd., ICICI Capital Services, and ICICI Personal Financial Services, came under the access of relationship managers of ICICI Bank. The merger brought wholesale and retail lending services offered by the?different ICICI groups of companies under the loans offered by ICICI Bank then.
Despite ICICI Bank having operating business for only eight years and a loan book of INR 20 000 as compared to INR 57 500 for its parent company, yet, the decision was acceptable to shareholders because the retail banking subsidiary had 1.31% NPAs from its loan books compared to 5.2% in the loan book of its parent company - not including write-offs. The merger led to the formation of an entity with a combined NPA-as-a-proportion of the total loan book of 3.5%, the second-lowest in the industry at the time, and an entity that raced ahead as the leading lender at the time.
The merger of big banks with their holding companies can be seen as a sign of growing consumerism and a strategic drive to unlock new client opportunities for all the involved companies. The synergy of the merger is aimed at complementing their service offerings. How markets react to the shares of the merged entities is up to speculation, as is the possibility of other HDFC group companies merging in the future if the current merger goes smoothly according to all plans led by its upper management. Mergers between other group companies, while likely, do not rule out the possiblity of mergers between competitors to unlock larger customers bases, and tapping into each other's positions of strength.
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