As HDFC twins join up, experts decode merger gains for investors, depositors and borrowers

HDFC Chairman Deepak Paresh addressed a press conference on the merger.

The upcoming merger of two mammoth entities from the same group – HDFC and HDFC Bank – has created a buzz that is likely to continue well after the amalgamation takes effect. Top management officials have indicated that the process could take between 12 and 18 months as they seek approvals from a host of regulators including the Reserve Bank of India, Securities and Exchange Board of India (SEBI), Competition Commission of India (CCI) and Insurance Regulatory and Development Authority of India (IRDAI).

HDFC twins’ senior management and other industry experts believe that the deal is a win-win for all stakeholders, but official information on changes for customers, if any, will be clearer only closer to the final merger. For instance, will existing HDFC home loan borrowers get an opportunity to switch to external benchmark-linked loans, which is mandatory for banks? Will the merged entity offer lower interest rates to depositors?

Also read: HDFC-HDFC Bank merger: All you need to know about the impact on customers

Moneycontrol spoke to five experts in the financial advisory space to understand what the mega merger means for investors and retail customers. Here’s what they said:

Vishal Dhawan, Founder and Chief Financial Planner, Plan Ahead Wealth Advisors

Actively-managed mutual funds would underperform due to this merger only if the merged entity's stock price outperforms and mutual funds are unable to participate due to investing limits.

The merger itself will take 12-18 months, as it needs several regulatory approvals. So, mutual funds have enough time to decide what they want to do with the excess holdings that they might have in the merged entity, if its weight in large-cap indices is more than the 10 percent investing limit of mutual funds. As this will impact the entire mutual fund industry, the Association of Mutual Funds in India may approach SEBI to ease the individual stock limits. Also, remember that both HDFC Bank and HDFC were relative underperformers on the stock market in the recent past. So, funds that actually had lower exposure to the two stocks would have benefitted to that extent.

So, we should not read too much into it right now, as there is still a lot of time for the merger to be completed. The final weight of the merged entity, whether in the Nifty 50 or any other large-cap index, would depend on how the two stocks perform from hereon, stock performance after the merger, and how the deal gets finally structured. Whether the weight of the merged HDFC Bank-HDFC entity crosses mutual funds’ investing limit or not, investors wanting to take large-cap exposure should in any case prefer low-cost passively-managed funds to active funds. In the last few years, we have seen that large-cap fund managers have found it difficult to outperform large-cap indices.

Also read: How HDFC Bank and HDFC stocks turned mutual fund favourites over the last 15 years

Anubhav Srivastava, Partner and Fund Manager, Infinity Alternatives

The merger of HDFC and HDFC Bank will lead to changes in domestic and global indices, which may result in many fund managers selling their holdings in these two stocks due to regulatory norms and index limitations. Also, investors should not overlook operational, regulatory, and cultural challenges involved in this merger. Synergies of the merger, if any, will be seen in the long term after the merger goes through. Euphoria seen in the stock prices of these two may not last long, as market participants price in these concerns.

Abhinit Kulkarni, Founder and CIO, Tequity Investing

The merger is beneficial from the perspective of stakeholders of both the entities. The country needs stronger and bigger financial institutions to support the flourishing economy. Bigger banks are vital for reducing the cost of capital, promoting credit growth and maintaining asset quality. The Rs 18 trillion combined balance sheet strengthens the bank’s ability to underwrite more. This merger is the beginning of the next phase of growth, not just for the bank, but also for the Indian banking system. It is the bank’s "stop me if you can moment!" From the investors’ perspective, short-term volatility cannot be ruled out, but they should be ready to buy at lower prices.

Preeti Zende, Founder, ApnaDhan Financial Services

Since the merged entity will be a bank, interest rates will be linked to an external benchmark. So, the rates could be more competitive compared to an NBFC (non-banking finance company). Current HDFC customers may get a chance to switch to better home loan interest rates after the merger. Things will be clearer closer to the merger completion, which will take considerable time. As far as HDFC depositors are concerned, even after the merger, the interest rate at which the deposits are made will be applicable till their maturity. If customers want to renew the deposit after maturity, then prevailing interest rates offered by the bank at that juncture will be applicable. Usually, the bank's interest rates are lower than that of NBFCs which means that for current HDFC customers, the chances of getting similar or higher interest rates are dim. Bank fixed deposits are covered under deposit insurance which is not applicable to NBFCs. So, after the merger, deposits up to Rs 5 lakh will be covered by DICGC which is a great relief to existing customers.

Ajay Shaw, Partner, DSK Legal

After the amalgamation, composite services of home loan and banking under one roof will be beneficial for customers of both entities. A possibility of overdraft facility for housing loan may bring a lot of relief for customers with seasonal idle cash, which was earlier not possible with HDFC, as only banks can provide this (facility).

External benchmarking brings not only transparency but also lowers the cost of borrowing over a period of time. Currently, NBFCs do not have to adhere to the external benchmarking regime, but banks have to. The Reserve Bank of India may give some transition time to HDFC Bank to move existing customers of HDFC to interest rates benchmarked to repo rates. But new borrowers will immediately benefit from this move.