Global rating agency S&P said Monday the proposed merger of HDFC with HDFC Bank will substantially increase the private lender’s market share, making it twice as big as rival ICICI Bank. “HDFC Bank Ltd.’s planned merger with its parent will boost the India-based bank’s market share and diversify its revenues,” S&P Global Ratings said. “While HDFC Bank will remain the second-largest bank in India post-merger, it will be twice the size of ICICI Bank Ltd.” In terms of market share, State Bank of India is the largest bank in the country with about 25% share, followed by HDFC Bank which currently has about 11% market share. The rating agency, however, reiterated its rating for HDFC Bank at BBB- and said the ratings remain constrained by the sovereign credit rating on India.
“The merger will likely result in significant market-share gains for HDFC Bank, given HDFC Ltd. (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,” the S&P Global Ratings said in a statement. “HDFC Bank’s larger balance sheet could enhance its wholesale lending opportunities,” it added.
Housing Development Finance Corporation is the largest mortgage lender in the country, and after the merger, the combined entity will have one-third of its portfolio in mortgage loans, compared with a reported 11% now, S&P said. “HDFC Ltd.’s mortgage portfolio largely comprises individual housing loans. Such loans tend to be granular. Moreover, HDFC Ltd.’s insurance, asset management, and securities subsidiaries will further diversify the combined entity’s revenue profile,” S&P added.
However, profitability of the private lender in the shorter term could be hit due to statutory reserve requirements and priority sector lending regulations. But the merged company will benefit from economies of scale, ability to raise funds at competitive rates, and HDFC Bank’s digital capabilities. “In our view, HDFC Bank should be able to absorb incremental risks from this portfolio given its adequate capital and provisioning buffers,” the rating agency added.
In a separate statement, Macquarie said though the merger will increase the bank’s product portfolio and ability to cross-sell, there will also be a drag on its P&L due to higher SLR requirements. Statutory liquidity ratio is the minimum percentage of deposits that a bank is supposed to maintain in the form of liquid money under RBI norms. “As per our rough calculations, HDFC Bank will have an excess SLR/CRR asset requirement of ~Rs700-800bn and will also need an incremental ~Rs900bn agriculture portfolio (based on 18% of borrowings) to meet PSL norms. These low-yielding portfolios could be a drag on the merged entity’s P&L,” it added.