Housing Development Finance Corporation (HDFC) chairman Deepak Parekh was at his eloquent best on Monday: “After 45 years in housing finance and providing 9 million homes to Indians, we have found a home for ourselves…,” he said, grinning from ear to ear. That search for a “home” has led to the mother of all mergers in Indian corporate history as the mortgage major is set to merge into HDFC Bank, creating a financial behemoth with a $169-billion market capitalisation (the second-largest in India) and among the 10 most valued banks in the world. The merged entity will be twice the size of ICICI Bank, the third-largest bank in the country and will shrink the gap with State Bank of India (SBI), the market leader.
Parekh said the merger is a coming together of equals. “Customers of both HDFC and the bank will be the biggest beneficiaries. However, over the last few years there have been certain regulatory changes for banks and NBFCs (non-banking financial companies), which have considerably reduced the barriers for a potential merger,” he said. The deal will significantly expand the room for cross-selling financial products to customers of both institutions, he added.
If approved by regulatory authorities, the merger will result in HDFC Bank becoming a 100% publicly owned institution, with HDFC’s 21% promoter holding getting extinguished. HDFC shareholders will hold a 41% stake in the bank, getting 1.68 HDFC Bank shares for one share of HDFC. The deal has been valued at $40 billion, according to HDFC. The pro forma capital adequacy ratio (CAR) of the merged entity will be 19.8%, against the current ratio of 19.5% for HDFC Bank and 22.4% for HDFC.
The deal will close a major gap in HDFC Bank’s asset book, where mortgages account for just 11% against 30-40% for other large banks, and significantly narrow the difference between the bank and the country’s largest lender SBI. The merged entity will have a loan book of Rs 17.87 trillion, against HDFC Bank’s current advances base of Rs 12.69 trillion. SBI’s total advances stood at Rs 26.64 trillion as on December 31, 2021.
While a likely merger between HDFC Bank and its 45-year-old promoter has long been one of the most anticipated and speculated-on deals, it is finally set to materialise as the regulatory and strategic environment is now poised in favour of larger non-bank lenders converting themselves into banks. More benign reserve requirements – 22% of liabilities being locked up as cash and bonds instead of 27% earlier – also bode well for the deal. A low interest rate regime makes it easier for the merged entity to bridge the reserve requirement gap.
The convergence of regulatory norms for banks and NBFCs with respect to liquidity requirements, regulation of large lenders, bad loan recognition and implementation of core financial services solutions mean that the merger now makes eminent sense.
The merger may offer more for the two institutions than the sum of their parts because there is limited overlap between their customer bases. HDFC Bank MD & CEO Sashidhar Jagdishan said many of the bank’s customers seek home loans outside of the group. “Our penetration into the home loan portfolio is extremely small in the bank out of the 68 million customers. A large portion of our customers actually have loans from other banks. When you look at that, the size is equivalent to another HDFC Bank,” Jagdishan said. Conversely, only 30% of HDFC’s customers have bank accounts with HDFC Bank, according to Parekh.
Analysts did express some misgivings about the capital implications of the proposed deal. Macquarie Capital Securities (India) said HDFC Bank will have an excess SLR/CRR asset requirement of Rs 70,000-80,000 crore and will also need an incremental Rs 90,000 crore agriculture portfolio to meet priority sector norms. “These low-yielding portfolios could be a drag on the merged entity’s P&L,” Macquarie said.
S&P said the merger will likely result in significant market-share gains for HDFC Bank, given HDFC (the parent) is the largest financier of mortgages in India. It will raise HDFC Bank’s loans by 42% to Rs 18 trillion, increasing the bank’s market share to about 15%, from 11% currently.
S&P said the combined entity’s earnings could improve over the next 3-5 years and the merger will provide the bank with profitable cross-selling opportunities to HDFC’s large pool of customers.
JP Morgan, Goldman Sachs and Citi were among financial advisers to HDFC Bank for the deal, while Credit Suisse, Kotak Securities and Jefferies were among advisers to HDFC.
