India’s largest private sector bank and its biggest mortgage provider are set to merge in a $40bn deal, creating a financing titan that is positioned to capitalise on the country’s economic recovery and rising demand for credit.
The all-share amalgamation announced on Monday would combine HDFC Bank, India’s third-biggest listed company by market capitalisation, and parent Housing Development Financing Corporation (HDFC) Limited, one of India’s biggest mortgage lenders, to create a finance entity with a market capitalisation of $185bn.
If approved by shareholders and regulators, the merger is expected to be one of the biggest deals in India’s corporate history. It comes after the Reserve Bank of India encouraged shadow lenders such as HDFC to convert into banks in a bid to reform the sector after a liquidity crisis.
According to the terms of the deal, HDFC Bank will be 100 per cent owned by public shareholders, while existing shareholders of HDFC will own 41 per cent of the bank. Shares of HDFC Bank and HDFC rallied on Monday morning after the announcement.
The tie-up between HDFC Bank and HDFC “is a merger of equals,” said Deepak Parekh, chair of HDFC, an important lender to low and middle-income clients.
“We believe that the housing finance business is poised to grow in leaps and bounds,” he said, adding that regulatory changes paved the way for the merger along with government subsidies and tax benefits for homeowners.
Amit Tandon, founder of Institutional Investor Advisory Services in Mumbai, said the deal looked “transformative for the financial sector” because the bank will be able to underwrite bigger infrastructure projects and more home loans. Tandon said India’s banks were now “gearing up for the next phase of growth and lending”.
By bringing together HDFC Bank and HDFC’s balance sheets, executives argue the new entity would have the financial firepower to take on more big-ticket loans.
As India’s economy recovers from the shock of the pandemic, demand for affordable housing loans is expected to rise. Home loans are equivalent to just 11 per cent of India’s gross domestic product, according to the National Housing Bank, a number below many developed countries.
After the merger, HDFC Bank’s 68mn customers “will be offered mortgages as a core product in a seamless manner”, the companies said. Previously HDFC Bank had not offered its own mortgages.
HDFC Bank was created in 1994 as a subsidiary of HDFC. “As the son grows older, he acquires the father’s business,” Parekh said at a press conference. “After providing 9mn homes for Indians, we have to find a home for ourselves.”
The merger is subject to approval by shareholders and a host of regulators, which Parekh said could take 12 to 18 months.