Shares in HDFC (Housing Development Finance Corporation) India’s largest housing finance firm and HDFC Bank, India’s largest private sector bank both soared overnight following the announcement of their merger.
Both finished up around 9% higher having earlier made double-digit gains.
The deal brings both scale and scope to the new combined entity, which looks set to become India’s third largest financial entity in terms of market captalisation.
DEAL RATIONALE
The combined entity will have a significantly larger balance sheet of around $237 billion.
This will enable it to underwrite larger infrastructure loans, accelerate the pace of credit growth in the economy, and boost the level of affordable housing.
The hope is the combination will also have an improved cost structure that will enable it to compete with other banks.
HDFC’s higher costs of funding had been a hindrance, particularly when competing against the likes of State Bank of India in a highly competitive loan market.
There are significant cross-selling opportunities that emerge from the merger.
As an asset class, housing loans are typically associated with attractive returns.
Overall, the new merged entity is set to benefit from increased scale, an improved product offering, and balance sheet resiliency. There is also significant potential to secure operational efficiencies.
WIDELY HELD BY EMERGING MARKETS FUNDS
According to FE Analytics data eight out of a universe of 57 emerging markets funds available to retail investors hold HDFC Bank and six hold HDFC, two hold both.
Among the investment trusts focused on the developed world, one out of 12 owns HDFC: JP Morgan Emerging Markets (JMG).
