HDFC Bank to merge with mortgage lender HDFC Ltd

India's largest private lender HDFC Bank will merge with the country's largest housing finance company HDFC Ltd to create a financial services conglomerate, the companies said on Monday, sending their shares sharply higher.

As part of the deal, shareholders of HDFC Ltd will receive 42 shares of the bank for 25 shares held. Existing shareholders of HDFC Ltd will own 41% of HDFC Bank.

Shares held by the housing finance company in the lender will be extinguished, making HDFC Bank a full-fledged public company.

HDFC Bank shares jumped as much as 10%, while HDFC Ltd surged 13% after the announcement.

Analysts believe the merger could be the outcome of a recommendation by the Reserve Bank of India in November 2020 that well-run large shadow lenders with an asset size of over 500 billion rupees may be considered for conversion into banks.

"The resulting larger balance sheet would allow underwriting of large ticket infrastructure loans, accelerate the pace of credit growth in the economy, boost affordable housing and increase the quantum of credit to the priority sector...," HDFC Ltd Chairman Deepak Parekh said.

As of Friday's close, HDFC Bank had a market value of 8.34 trillion rupees ($110.06 billion), while HDFC Ltd was worth 4.44 trillion rupees ($58.59 billion).

"This is a long-awaited merger and will be beneficial for both the companies but particularly more for HDFC Ltd that was competing with the likes of State Bank of India in a competitive home loan market, leading to pressure on margins due to disadvantages to its cost of funds," said Asutosh Mishra, research analyst at Ashika Stock Broking.

"Now the combined entity will have the same cost structure as other banks, which will allow them to compete better with their peers."

The subsidiaries and associates of HDFC Ltd will shift to HDFC Bank, the companies said in a regulatory filing.