One of the financial sector legends, Mr. Deepak Parekh, hangs up his boots on the same day the merger of HDFC Ltd into HDFC Bank is effective. It has been an illustrious 45-year career for Parekh, but what does this mean for the bank?

It is a mega merger in size

In terms of sheer size, the merged HDFC Bank will be huge. It will still be the second largest bank in India but it will substantially narrow its gap with SBI and widen its lead over ICICI Bank. The deal also puts HDFC Bank at a global scale in terms of valuation. For example, the merged entity will be worth around $178 billion, making it the fourth most valuable bank in the world by market cap. In terms of size and reach in India, it would be almost unmatched. Above all, there is a complex array of units.

There are also some real gains arising from the merger. Both, HDFC Ltd and HDFC Bank, have fairly low NPAs by the industry standards and that would keep the asset quality intact. The merger also gives them access to long term assets and to long term funding sources. In addition, the cost to income ratio would come down sharply as the C/I ratio of HDFC Ltd is sharply lower than that of HDFC Bank. For now, the two financial giants are retaining all their employees but going ahead some rationalization may be on the cards. That is likely to make the structure leaner and meaner. It looks like a marriage made in heaven.

Handling size will be a challenge

One of the biggest challenge that the merged entity will face is size. Both HDFC Ltd and HDFC Bank have grown organically all these years, barring very few acquisitions along the way. This has allowed them to pace the growth of assets and keep the NPAs under check. However, now there is going to be a big expansion of the book size as well as major capital dilution for the combined entity. That is likely to make it a lot tougher to keep the shareholder ratios attractive for the merged entity. Also, the compulsion to retain the entire staff of HDFC Ltd is going to add a lot of cost pressure on the combined HDFC Bank.

Did HDFC Ltd get a good deal? 

Scratch the surface, it looks like a much better deal for HDFC Ltd than for HDFC Bank. The reason are not far to seek. HDFC Ltd shareholders get 25 shares of HDFC Bank for every 17 shares held. Post the merger, shareholders of HDFC Ltd will hold nearly 41% of the merged entity. It is tough to see the benefits that would accrue to the shareholders of HDFC Bank from the current merger. Size will surely be a factor, but size normally comes at the cost of asset quality, and that has been the major brand of HDFC Bank over the  years. The next few quarters will demonstrate the value of the deal to the bank. Puri had always resisted the deal, but now that is set to become the paradigm!

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