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HDFC + HDFC Bank Reverse Merger – Insight

November 26, 2008

There has been a whisper doing the rounds for quite some time now that HDFC will go for a reverse merger with its child – HDFC Bank. However, the time seems to be right if RBI meets some relaxations sought by HDFC.

HDFC has always taken a stand that a merger with their banking associate, HDFC Bank, would make sense only if reserve requirements (Statutory Liquidity Ratio and Cash Reserve Ratio) were lower or/and if they were granted some exemptions/flexibility in meeting these requirements.

In the current economic environment, where regulators globally are encouraging NBFCs to convert into banks, the possibility that RBI will grant some leeway on compliance with reserve requirements cannot be ruled out.

Rationale for Merger:
The merger would complement each of the business needs. HDFC Bank won’t be just a balance sheet merger, but will lead to many synergies for the group,

  • For mortgage financing business it would help to improve the funding costs leveraging HDFC Bank’s strong deposit franchise.
  • For the bank it would provide it with the much needed capital and a high RoE business which will allow the bank to grow its other businesses without a need for further dilution.
  • Net-worth of the merged entity (~ Rs285 bn-FY09CL) would significantly enhance its ability to take big ticket exposures. 4. Economies of scope – a large product suite would increase the cross selling potential.
  • Will allow HDFC Bank to offer a complete product suite, and will put to rest shareholder concerns on mortgage product, transfer pricing.
  • Optimal use of Infrastructure from branches to IT networks etc.

The merger ratio of HDFC into HDFC Bank is more likely to be in favor of HDFC shareholders given the embedded value of HDFC’s non-banking financial services business, especially life insurance and asset management. Some speculate that it could be in the region of 1.8 shares of HDFC Bank for every 1 HDFC share.

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