HDFC-HDFC Bank Merger: Thank You for Your Service Mr Deepak Parekh...
India’s finest professionally-run business entity is soon going to be history. Housing Development Finance Corporation Ltd (HDFC Ltd), created by Hashmukh T Parekh and nurtured by his nephew Deepak Parekh, will soon become a ‘part’ of the bank it created. Hasmukhbhai Deepakbhai Finance Company is what Dalal Street called HDFC in tribute to their larger-than-life reputation as institution-builders who always had their ear to the ground as well as the ugly underbelly of the realty business those days. I can unambiguously state that we, as investors, are losing something good. 
 
HDFC Ltd had built up a culture of trust and integrity which we struggle to find today. My memories go back to the late-1980s, when I applied for a housing loan. It was such a pleasant experience and unlike what was the norm with other lenders those days; the professionalism and the politeness has stayed with me throughout my working life. 
 
I also had the privilege of interacting with a large number of people working at HDFC Ltd and it was always a pleasure. Even when I was a struggling financial intermediary, I was given time and knowledge from so many in the finance and treasury team! When I worked with CRISIL, which was also a great experience, I was fortunate to have Pradip Shah, an HDFC alumnus, as the chief executive officer of CRISIL. The culture and integrity, that was part of HDFC Ltd, perhaps rubbed off on the early team at CRISIL. It made me realise why HDFC had such a great culture. 
 
Deepak Parekh will go down in corporate history as India’s finest enterprise builder. HDFC was the first housing finance company set up in India. Until then, you could go only to Life Insurance Corporation (LIC) for a housing loan, if you had an endowment policy. HDFC found a way to navigate the messy, cash-heavy real estate business in India and make mortgage lending a possibility. Everything at HDFC was process-driven and, even when it has reached the size that it has today, the asset quality is outstanding.
 
I have often wondered about succession at HDFC Ltd, given the legacy of the two founding chairmen. Even today, while Deepak Parekh is not in an executive position at HDFC, the company is managed very well with a team that he has created and nurtured for over four decades. In another five years, most members of the team will retire. I have always wondered about what next, or who next, for the institution?  This merger with HDFC Bank resolves this issue. 
 
Yes, there will be some cultural mismatch, given the aggressive nature of the banking business and the conservative mindset of the parent company. Hopefully, in a couple of years, the cultural transition will be completed. As an old-timer, I will miss the solidity and comfort of HDFC; but, as a shareholder, I would still be part of India’s finest bank—an organisation that would have come out of the shadows of the ‘giants’ who created and nurtured it. Infosys is another such company (younger than HDFC) that has emerged out of the founder’s shadow. The HDFC merger has set the bar very high for new entities that wish to be seen as professionally-managed, independent companies and not family enterprises.
 
As an investor, I am not worried about the ratio/ the financial outlook, etc. I am looking at the next 10 years and looking at what HDFC Bank will look like then. Today, it leapfrogs in size. The overall asset quality continues to be great. HDFC Ltd has always raised money on fantastic terms. They have an incredibly loyal fixed deposit (FD) base which includes individuals and trusts. All these will have to become FD-holders in the Bank. Will the returns offered to them be lower than what they are getting today? If so, will they stay on as FD-holders with the Bank? Hopefully, their exit will not be of a magnitude that causes a problem to HDFC Bank. However, HDFC FD-holders will lose one of the safest options for a better return than a bank deposit.
 
Most investors I know have investments in both entities. The key question for them is whether they retain their entire holding / buy more/reduce their holding, after the merger. It is not an easy choice. For those who believe in ‘diversification’, it is a big challenge. How much should one reduce? For those who track indices, there is no option. You will not reduce. For mutual funds (MFs), the task is harder and most will probably end up downsizing their holdings. 
 
My question is: What has changed for me to decide on reducing my position or otherwise? Has the credit risk increased? Probably yes. If I was happy with HDFC, it was because of its impeccable housing loan portfolio. I have never seen an HDFC sales person hustling anyone into taking a home loan. Their focus has always been on quality. One also had the comfort of knowing that Deepak Parekh’s experience and expertise was at play in vetting the entire portfolio. That will now change. HDFC Bank has been aggressive in growing its size and profits. While it has managed things extremely well, to my mind, it rates a tad lower than HDFC Ltd. The combined entity will probably make the same or higher amounts of money, given that some overheads will be eliminated. Will HDFC Ltd way of doing business change when it becomes a division of the Bank? The answer to this will probably emerge over the next two years. I know for a fact that the CEO of the combined entity has his work cut out. He has to manage two different cultures as well as the seniors at the housing finance company who will suddenly find themselves in a new reporting environment—many may leave, if they do not get a good fitment.
 
The other big impact of the merger is on our stock indices. The weight of the combined entity will be inordinately high. It will be nearly 15% of the NIFTY! Reliance and HDFC Bank (based on current prices) will account for 30% of a 50 stock index. Clearly, not a good thing for index investing. The flow of funds will be big factor deciding stock prices!
 
As an individual investor, it is best not to compare performance with the index. It is a lopsided measure. I would rather focus on portfolio risk. Even if HDFC Bank and Reliance were the best companies in the world, a weightage of 30% in a 50 stock index does not make sense, from a risk perspective. Exchange traded funds (ETFs) will not see any re-balancing, given that it is a merger of two components in the index. Another company will be added to the index and jockeying for an entry would already have commenced. 
 
My approach to my investment portfolio would be very simple. I will not add any more shares of HDFC or HDFC Bank. Over the next one year or so, I will gradually reduce my exposure by selling some stock. If my portfolio had 10% of each of these stocks, I will probably cap the exposure to 15%. Some old-timers like me will have inertia and probably do nothing. Also, for an HDFC shareholder, the transition to being a HDFC Bank shareholder would perhaps mean lower dividends.
 
An HDFC shareholder got Rs23 per share as dividend last year, as opposed to Rs6.50 per share in HDFC Bank. To a long-term shareholder in HDFC Ltd, this is a big loss. I would have been better off if the two entities had remained separate. The combined entity will definitely not give me a dividend payout that I have been used to.
 
As an investor, this merger does not have anything special. Was it possible that someone could have acquired HDFC Ltd at a great price? Would the HDFC Ltd shareholder have got a better price, had that happened? I do not have answers. On the day of the announcement, the market-capitalisation of HDFC Ltd and HDFC Bank jumped. In the next few days, the market has given up the entire gain. We have to see where the stock prices head over the next few months. 
 
Kudos to Deepak Parekh for having nurtured and helped create two of India’s finest companies. As shareholders, we have had an incredibly smooth ride over so many years. The future, without his guiding hand, is perhaps a bit less comforting at this stage. It is a huge challenge for anyone to fill Mr Parekh’s shoes. As a shareholder in both companies, I wish Sashi Jagadeesan a lot of luck in managing the expectations of shareholders like us.
Comments
hirenvakil67
4 months ago
Well,, we have heard "Nothing's Constant but, Change"

Mr. Deepak Parekh Esq s Legacy Stays! Legacies do not fade provided, applying in present scenario, Investors Continue its Faith to Support Grow HDFC as "A Whole Trust" suffice to state if we as Investors maintain "Faith & Trust" HDFC Remains!!! After all, we are in a World of give & take So, business point of view, if Investors Give! So will it Take!

Besides, there's never any permanent thumb rule to invest and there's never a perfect world.

Indeed Pots of Good! Luck! to The Successor Sashi Jagadeesan ????????
ca.kamalesh
4 months ago
For every satisfied customer like the writer there is atleast 1 dissatisfied customer like me. My experience with the HDFC group has been anything but satisfactory. HDFC's bad service can give the PSU Bank's a run for their money. Be it Credit Cards, Housing Loan and Enet banking - there is tremendous scope for improvement. With the fast improvement in the workings of PSU Banks, the difference between the private banks (including HDFC) and the PSU Banks has become negligible. My only grouse is that bad service is a given in PSU Banks and so the expectations are not much. Private Banks like HDFC present a rosy picture and one is very unhappy at the service meted out.
pgodbole
4 months ago
Sadly, the culture and values that Deepak Parekh nurtured at HDFChave not percolated to other offshoots in HDFC group viz. HDFC Bank, HDFC Life, HDFC Ergo or HDFC Mutual Fund, all of whom have been found to indulge in sharp and questionable practices to boost their earnings in a highly competitive environment. In that sense, this merger actually lowers the culture at merged entity. As rightly mentioned by author, merged entity will not be able to dole out same level of dividends to shareholders of HDFC upon their converted holding in HDFC Bank. In that sense, HDFC shareholders are losers.
Udayan Dasgupta
4 months ago
Two points stand out from the article
- ramifications of creating such a monopoly in financial business
- whether small investor interests have been adequately taken care of in the merger
I wish someone/Moneylife would discuss these issues
arvind kumar singh
4 months ago
as a senior citizen,i was confused regarding to increase the share holding or to decrease the share holding .your article made my concept clear.thanks.
sudhanayak105
4 months ago
HDFC Bank is not in any way better than other private banks. These banks blatantly missell financial products to earn higher commission. HDFC life had one of the highest commissions for their ulip at one point of time. Its just andho mein kana raja.
Sajil Meledath
Replied to sudhanayak105 comment 4 months ago
Actually HDFC Life wasn\'t part of HDFC Bank

It was part of the NBFC HDFC.
cvkakatkar
4 months ago
Several FD brokers - will miss out the commission they earned from HDFC. Loss for them.
cvkakatkar
4 months ago
Very well written
balajed
4 months ago
Very well versed. Appreciated. Mr. Balakrishnan, very consciously, attempted not to be contentious. At the present, having merger just announced, that's but what is expected of him. Having been in observance of HDFC and its Banking arm, I was a bit perturbed on some of his assertions, especially when he very transiently suggested on the prospect of an external ownership of HDFC as an independent entity? I am not too convinced, Sir.

Altogether, it was indeed very hearty read you even though it was smack of any attributes. Aplogies, if I was forthright.
ramnjay
Replied to balajed comment 4 months ago
Thanks for this excellent perspective. Helped me as a small investor have a better understanding.
Ramesh Popat
4 months ago
good one indeed !
S K Nataraj
4 months ago
Excellent.
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