Indiaís largest housing finance company is considering a possibility of merging with its associated company HDFC Bank. If it happens the combined entity would be better placed in terms of synergies.
Recently the RBI has also given green signal on the Universal Banking concept, providing the impetus HDFC looking for. The central bank in its policy has said that institutions have the option to transform into a bank provided the prudential norms as applicable to banks are fully satisfied.
The table below indicates both HDFC and HDFC Bank have lot of synergies in terms of financial performance. In terms of products also the merger is likely to provide added benefits. At present while, HDFC focuses on housing finance, the bankís focus is on retail banking products such as loans against shares, personal loans and auto loans.
Financial performance (Rs m)
Year ended March 2000
Profit after tax
Year ended March 2000
Operating profit margins
Net profit margins
HDFC Bankís operating margins are comparatively higher that that of HDFC. An added advantage of merger would be that lending rates on housing finance would drop since HDFC would be in a position to reduce its cost of funds (as it could utilize the large low cost savings deposit pool of HDFC Bank). The company currently sources nearly a third of its funding requirement through fixed deposits. Reduction in the rates in fixed deposits is not possible in the scenario of intense competition. Also if the rates are lower the deposits could flow to mutual funds.
HDFC proposes to enter the life insurance business in partnership with Standard Life of the UK. The merged entity would not have any problem in meeting the RBIís requirement for entering into the insurance business as it would meet all requirements regarding net NPAs, capital adequacy and net worth.
Currently HDFC Bank enjoys a premium valuation compared to HDFC. The group is facing strong competition from ICICI, which might consider the option of merging with ICICI Bank. However the HDFC group would continue to enjoy the higher valuations than the other players because of its asset quality, shinning financial performance and ability to grow taking the opportunities thrown by liberalized economy.
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