UPDATE 3-India’s HDFC Bank to merge with mortgage lender HDFC Ltd

* HDFC Ltd shareholders to get 42 shares of HDFC Bank for 25 shares held * Combined company to have balance sheet of $237 bln * HDFC Bank shares up 14.4%, HDFC Ltd surges 19.6%

(Adds details of deal, comments of analysts) By Chris Thomas and Nupur Anand BENGALURU, April 4 (Reuters) – India’s largest private lender HDFC Bank will merge with its biggest shareholder, creating a financial services conglomerate with a $237 billion balance sheet to better tap demand for credit in an economy rebounding from the pandemic. HDFC Bank’s deal with housing finance firm HDFC Ltd , which owns about 21% of the lender, will build on its 68 million customers and could propel the combined entity to become India’s second most valuable listed company. As part of the deal announced by both companies on Monday, 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, the combined entity, which will become a full-fledged public company as the housing finance company’s stake in the lender will be cancelled in the deal. HDFC Bank shares jumped as much as 14.4%, while HDFC Ltd surged 19.6% after the announcement. “The merger will provide more synergies between the two lenders and will allow them to leverage the balance sheet of the combined entities and to increase cross-selling of products and aid in expansion,” said Karthik Srinivasan, analyst at ICRA. “Additionally, there are some other advantages available to a bank such as lower cost of funds which the merged entity can now leverage upon.” 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). “Over the last few years, various regulations for banks and NBFCs have been harmonised, thereby enabling the potential merger,” HDFC Ltd Chairman Deepak Parekh said, referring to shadow lenders also referred to as non-banking finance companies (NBFCs) in India. The Reserve Bank of India issued guidelines in November 2021 which allows well-run large shadow lenders with an asset size of over 500 billion rupees to be converted 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…,” Parekh said. The companies expect the deal to be completed in the second or third quarter of the financial year starting in April 2023. “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.” ($1 = 75.6950 Indian rupees)

(Reporting by Chris Thomas in Bengaluru; Editing by Arun Koyyur and Muralikumar Anantharaman) ((chris.thomas@thomsonreuters.com; +91-80-6749-8695;))