India’s largest housing finance company, HDFC Ltd, and India’s largest private sector bank, HDFC Bank, have announced plans for a transformational merger that will create a financial services behemoth with mouth-watering prospects for synergies, cross-selling, and value unlocking for shareholders. This will result in the creation of India’s third-largest listed firm and the markets gave a thumbs up to the move with shares of both firms surging during days trade on April 4.
Veteran banker and HDFC Ltd Chairman Deepak Parekh summed up the deal aptly when he said, “ After 45 years in housing finance and after providing 9 million homes to Indians, we have to find a home for ourselves. And we have found a home in our own family company, HDFC Bank”
But what’s India Inc’s take on this mega-deal which has sent ripples through the industry?
Moneycontrol’s Ashwin Mohan spoke to a cross-section of senior industry executives who weighed in with their views –
Ajay Piramal, chairman of Piramal Group which is present in the financial services segment told Moneycontrol, “ I think this is a tremendous event and a really nice culmination of the contribution that Mr Deepak Parekh has made to the Indian financial services industry. I give him full credit for creating the finest financial services institution, whether it's a bank, NBFC, or an insurance company. I am delighted and was waiting for this day and it has come. This feat by Mr. Parekh reminds me of Dhoni's match-winning six in the 2011 World Cup".
The head honcho of another diversified conglomerate Harsh Goenka, Chairman, RPG Enterprises called it a “watershed moment” for India’s financial sector. He elaborated, “ The merger has a very strong rationale that includes a mammoth balance sheet which should make cost of funds competitive, significant potential for synergies and a global scale of operations. It’s a win-win for all stakeholders. Ek aur ek gyarah.”
“This should have happened earlier, but better late than never, “ says former Sebi chairman M Damodaran who has founded Excellence Enablers, corporate governance think tank. He believes the proposed merger of these two large entities should be positive for all stakeholders
Veteran investment banker and chairman of DSP Group Hemendra Kothari who is Deepak Parekh’s junior from Sydenham College, Mumbai feels Parekh, the “godfather” of the group and the person behind its meteoric rise over the past few decades will be missed for his experience and astute business sense.
The deal is expected to take around 15 to 18 months to complete and RBI norms do not allow anyone above 75 years to be on the board of a bank. Parekh has already crossed that age. Atanu Chakroborty, the current chairman of HDFC Bank is expected to chair the combined entity with HDFC Bank CEO Sashidhar Jagdishan in the corner office.
“ The ratings of the institution will improve and on the distribution side, HDFC Ltd will be much stronger than before ( especially for their insurance vertical),” Kothari added
Speaking about the merger benefits for both the firms, Pramod Kumar, Managing Director & Head of Banking, Barclays India said, “For the bank, it completes its suite of products including having mortgage assets on its own books. To HDFC, the bank can provide even lower-cost funding to the mortgage business. Even though HDFC was always borrowing at very fine rates on its own strengths but still bank deposits can be cheaper than that. Besides, it gives HDFC shareholders an additional opportunity to grow beyond just mortgage and own a much more diversified mix of businesses.”
Addressing some of the key challenges, Kumar added, “ There are some obvious issues to address like Debentures, ECBs, SLR and CRR as well as ownership stakes into several investments that HDFC has in the asset management, life and non-life insurance businesses, which I am sure RBI would need to look into. What we might miss is the HDFC DNA of spawning new and very successful businesses that have created huge value in the past but hopefully, the bank will be able to preserve and nurture that !”
Private equity veteran and ex Citi India CEO Sanjay Nayar feels the mega transaction makes a lot of strategic sense for both the organisations as well as their respective customers. “ There is a clear impetus for the mortgage business on a combined basis. This is a complex deal subject to regulatory approvals and there could be challenges in execution but I am sure they must have proactively addressed those.”
In response to a query on whether the transaction would trigger consolidation in the banking sector, former SBI chairman Rajnish Kumar who is an advisor to Baring Private Equity Asia and Kotak Investment Advisors told CNBC TV-18, “It may trigger the desire to consolidate amongst private sector banks, don’t see the further possibility of mergers in public sector banks. You need a certain scale today to operate along with investments in technology which are substantial.”
Kumar, who is also on the boards of HSBC Asia Pacific and BharatPe, further added, “There has always been a desire and need felt for larger entities in the banking system. HDFC Bank is a strong entity and it now becomes stronger."
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