HDFC-HDFC Bank Merger: Numbers That Will Shape The Combined Behemoth

Housing Development Finance Corp.'s merger with HDFC Bank Ltd. will create not only a banking behemoth but also one of the world's most valuable financial institutions as per market capitalisation.

As the merger becomes effective on July 1, the combined market capitalisation of HDFC and HDFC Bank will be northwards of Rs 14.6 lakh crore, or $178 billion, according to June 30 data, when the individual market capitalisation stood at Rs 9.46 lakh crore and Rs 5.19 lakh crore, respectively.

The merger would create the fourth most valuable bank in the world as per market capitalisation.

U.S.-based banking giants like JPMorgan Chase and Bank of America occupy the first and third spots, respectively, according to Bloomberg data, and the Chinese state-owned Industrial and Commercial Bank of China ranks second.

The merger will also expand HDFC Bank's Rs 16.14 lakh crore loan book by Rs 7.24 lakh crore, according to financials for the quarter ended March 31.

Similarly, the bank's deposit base of Rs 18.83 lakh crore will expand by Rs 1.52 lakh crore—the size of deposits held by HDFC.

Apart from the bank's balance sheet, branch network, and employee count, the merger will also have an impact on key financial metrics for HDFC Bank.

"The impending merger with HDFC would have an immediate positive impact on the cost-to-income ratio, pushing it down to the mid-30s level from the current around 40% levels," analysts at Bernstein wrote in a June 27 note.

HDFC Bank had a cost-to-income ratio of 40.4% in Q4 FY23, against HDFC's ratio of 9.20% at the same time. Bernstein expects the ratio to drop to about 36% immediately after the merger, the note said.

"The CI ratio would drop sharply to around 32% if the bank's cost of funds inches closer to the pre-merger level," the note added. The pre-merger level of cost of funds would be achieved if deposits account for 90–95% of liabilities and the current account savings account, or CASA ratio, rises to 40–42% levels, it stated.

While the bank's return on assets ratio is expected to stay stable around 2-2.1% post-merger, its return on equity ratio could see an increase of 1–1.5% following the merger, according to Asutosh Misra, head of research at Ashika Stock Broking.

HDFC Bank and HDFC reported RoE ratios of 16.7% and 12.17% as of March 2023, respectively. The improvement in RoE will be driven by a shrinking of the base on account of the cancellation of equity, Misra said.

The combined entity will cater to a total customer base of 88.4 million people.

HDFC Bank and HDFC are scheduled to hold board meetings after market hours on Friday. Following the meetings, the two entities are expected to announce the effective date and the record date of the merger.

Tentatively, the merger is expected to be effective on July 1. HDFC's stock is expected to delist on July 13, and the merged HDFC Bank stock will start trading by July 17, tentatively.

Shares of both HDFC Bank and HDFC rose 1% as of 12:30 p.m. on Friday, as compared with a 0.79% gain in the Nifty Bank index.