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Commenting on the margin impact, Jagdishan said the bank's margin has always been between 4-4.4%. Now, the margin on a mortgage book will be lower. This will depress the margin. However, since it is a larger ticket loan for a longer tenor, the operating cost is lower, he said. Also these loans have lower credit losses.
Net of credit cost, we will be better on a apple-to-apple basis, he said.
The merger proposal does not plan on creating a non-operative financial holding company, said HDFC Bank chairman Atanu Chakraborty. The option has, however, been discussed.
When asked whether HDFC Bank's management bandwidth will get taken up by the merger over the next 12-18 months, Jagdishan said that the merger process will be "seamless dovetailing" of one entity into the other.
It is just a "lift and move", said Jagdishan.
Only 30% of HDFC Ltd have accounts with HDFC Bank, said Parekh. The organisation will engage with customers to encourage them to bank with HDFC Bank, he added.
On the other hand, HDFC Bank will be able to push mortgages through its network while also pursuing HDFC Ltd's customers to cross-sell other products of the bank.
Mistry explained that since the shares held by HDFC Ltd in HDFC Bank Ltd will be extinguished on the merger, the number of shares will come down. Hence, from an earnings per share perspective, the deal will be immediately accretive.
According to Parekh, the company has asked for two-three years to comply with CRR, SLR and priority sector loans on the existing HDFC Ltd book. On any new loans, these requirements will be met.
Mistry added that the cost of capital has also reduced, which makes the cost of the merger negligent.
The actual capital adequacy of the bank will be higher after the merger, Mistry added.
HDFC Ltd is discussing the structure of holding the insurance company, said Parekh. We have to comply with RBI regulations on this, he said.
The same applies for HDB Financial. "We would love to have it as a subsidiary but if RBI requires us to merge, we will comply," said Jagdishan.
Explaining the rationale behind the merger, HDFC Bank CEO Sashidhar Jagdishan said a number of factors played a role.
The interest regime has come down dramatically from a range of 6-7% to 3-4%. As such, the drag on the SLR and CRR is no more a drag. The government security yields are around 6% and the cost of funds is 3-4%, so it is still a positive drag.
Priority sector requirements will be there given the large balance sheet that HDFC Bank has. However, the bank has made significant headway in lending to micro enterprises and will step up lending in that segment. In addition, affordable housing loans will also contribute to this segment of loans.
Mortgages are just 11% of the bank's loan book compared to 30-40% for peer banks. When regulatory approvals come in, we will unleash the product across all branches and touch points.
The process will take 12-18 months to complete. The RBI does not allow anyone above the age of 75 to be on the board of the bank, said Parekh. "As such, I will not be on the board."
Keki Mistry, vice chairman of HDFC Ltd, will be a few years short of the age limit and may choose to continue at the bank in some capacity. He is, however, not keen to continue in an executive capacity.
"We will all be taken care of. We will not be thrown out. It is a friendly merger," said Parekh. "The son has grown up and taken over the father's business," he added.
The combined entity, which will now have loans across mortgages, retail, large corporates and small businesses, will be able to withstand economic cycles, said Atanu Chakraborty, chairman of HDFC Bank Ltd.
The deal will see two complementary sets of systems come together, he said, adding that the technology and the employee base across both organisations will be a match.
"After 45 years of housing finance and 9 million homes provided to Indians, we had to find a home for ourselves. We have found it within our own family and in our own bank," said Deepak Parekh.
The combined entity will be able to offer mortgages seamlessly, said Parekh.
Capital infusion into the bank will no longer be a drag on return on equity of mortgage companies. The value of HDFC Ltd. will not be depressed due to the holding company discount either.
According to Parekh, the changing regulations facilitated the deal.
Non-banking finance companies are now required to hold liquidity coverage ratio. Upper layer NBFCs also have similar bad loan norms and other rules are also being harmonised between banks and NBFCs, said Parekh.
This made a merger between HDFC Bank and HDFC Ltd more lucrative.
As part of the deal, shares held by HDFC Ltd in HDFC Bank Ltd will be cancelled and the merged entity will be 100% held by public shareholders, said Deepak Parekh, chairman of HDFC Ltd.
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