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HDFC Bank has approved merger with HDFC Investments Limited and HDFC Holdings Limited. Post-merger HDFC Limited will hold 41% stake in HDFC Bank. This shall enable the bank to build its housing loan portfolio and enhance its existing customer base. HDFC Bank shares jumped as much as 14.4%, while HDFC Ltd surged 19.6% after the merger announcement.

“We expect HDFC Bank's margin trajectory to recover gradually over FY23, while the uptick in Retail loan growth and unsecured products will be supportive of fee income. Trend in Retail deposit too remains healthy, with the bank witnessing a sequential improvement in its CASA ratio to 48%," said brokerage house Motilal Oswal. It has maintained its Buy rating on bank stock with a target price of 2, 000 per share.

As part of the deal announced, 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.

The companies expect the deal to be completed in the second or third quarter of the financial year starting in April 2023.

“With this merger, HDFC Bank gets an unparalleled advantage through the mortgage portfolio providing it a quantum leap in distribution to semi urban and rural areas with a huge opportunity to cross sell bank products to a very sticky client base. The combined entity will be able to extract substantial synergy benefits which abode well for all stakeholders and shareholder. We are already seeing that in the stock market reaction to this unprecedented announcement today," said Samir Bahl, CEO, Investment Banking at Anand Rathi Advisors.

“While the markets have given a euphoric reaction to this news, we believe that the earnings of HDFC Bank could be downgraded in the near term and the onus will be on the management to prove the upside of the merger through operating performance," said Abhay Agarwal, Founder, and Fund Manager, Piper Serica.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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