HDFC and HDFC Bank fell sharply for the third day in a row after the merger deals were announced. HDFC twins succumbed to profit-booking, falling 1.82 per cent to Rs 2490.25. HDFC Bank was trading at Rs 1534.35, down 1.06 per cent. Share price of HDFC Bank and HDFC had risen nearly 10 per cent on Monday, soon 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 the merger deals were announced.
“Keeping in mind that multiple subsidiaries are required to be merged, there may be some regulatory overhangs, especially in the insurance business, where the central banks may encourage banks to increase their stake,” said an analyst with a domestic brokerage house. It is not very comfortable to take.
HDFC Bank on Monday said its board has approved the merger of HDFC Investments and HDFC Holdings with HDFC and HDFC into HDFC Bank. The combined entity will create a new financial sector in India and after the share price jump on Monday, the market capitalization of both was overtaken by TCS.
HDFC Bank said the proposed transaction will enable HDFC Bank to build its home loan portfolio and enhance its existing customer base. The private lender said the proposed transaction is based on leveraging the significant complementarities that exist between the parties.
“The proposed transaction will create meaningful value for various stakeholders, including stakeholders, customers, employees, as the combined business is expected to drive increased scale, broader product offerings, balance sheet flexibility and synergies in revenue opportunities, operational efficiencies and underwriting will benefit from. efficiency, among others,” it said
HDFC has total assets of Rs 6,23,420.03 crore, turnover Rs 35,681.74 crore and net assets Rs 1,15,400.48 crore as on December 31, 2021. On the other hand, HDFC Bank has a net worth of Rs 19,38,285.95 crore. Turnover (including other income) of Rs 1,16,177.23 crore for the nine months ended December 31, 2021, and net worth of Rs 2,23,394.00 crore as on December 31, 2021.
HDFC twins merger gets support 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. This deal on a pro forma basis provides EPS and BV accretion for HDFC Bank at 4% and 8% respectively and hence value accretion to the existing shareholders of HDFC Bank. The merger is positive for HDFC Group as it will reduce the single product exposure for HDFC Ltd and also give it access to low-cost CASA deposits. In addition, it will give both the entities significant scope to cross-sell their products to each other’s customers. Whereas additional prudential requirements like CRR/SLR and PSLC will prove to be margin pressure for HDFC Ltd. We believe that access to low-cost CASA deposits will remove most of the pressure on margins. Post merger announcement we maintain our BUY rating on HDFC Bank with a target of Rs. 1,859.”
Morgan Stanley was quoted as saying by CNBC-TV18 that the proposed merger would benefit both HDFC Bank and HDFC, while it would generate EPS (earnings per share) – incremental in the first full year (FY25).
It added that ROE (return on equity) comes in near term given capital accretion, while credit growth pick-up would mean pre-merger ROE till FY26.
Analysts at Prabhudas Lilladher said, while the merger would seem attractive from a purely a scale standpoint, we need to look at a few key variables. Firstly, the merged entity will have to comply with CRR/SLR and PSLC requirements which will put a slight pressure on margins. Secondly, HDFC Bank cannot underwrite a portion of the developer loans that HDFC used to onboard which can be countered in addition to the below-the-key housing customer loans. Hence the overall yield may be less. This will be offset by lower cost of funds due to the bank’s access to CASA deposits.
At an operational level, branches in similar locations can be merged which can save costs, although there will be no transition costs for branches that are in common locations. Hence, prima facie it appears that soon after the merger, the RoE for HDFC Bank may decline from the current levels, although the merger will be positive from a scale and cross-sell standpoint. Moving forward FY24ABV, we maintain the multiple at 3.6x but increase the target price to 2,000. Buy keep.
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