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The merger between HDFC Ltd and HDFC Bank may have long-term implications for India’s banking and non-bank financial institution (NBFI) sectors, Fitch Ratings said on Tuesday.
“The proposed merger could redefine the competitive landscape for banks, and increase the prominence of M&A among banks seeking to close market-share gap with the merged HDFC Bank,” it said, adding that it could also influence the evolution of the NBFI sector, particularly for large entities that have nurtured banking ambitions amid tightening sector regulations.
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Post HDFC twins merger, banks to gain larger home loan market share
Customers will remain insulated from these developments and will even benefit from the merger, say expertsFitch said it believes both entities stand to gain from the deal.
HDFC Bank will gain about 500 new branches, improve its operating efficiency as HDFC Ltd’s cost/income ratio is 10 per cent versus the bank’s 36 per cent. It will also enable the private sector lender to diversify its loan book, as the bulk of the loans will be mortgages.
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Eyes stake sale of 15–25 per cent at a likely valuation of ₹3,000 croreHDFC Ltd will benefit from greater liquidity and a gradual shift to lower-cost deposits to support a more competitive offering in the large-ticket housing space, the agency further said.
It will also be able to expand in affordable-housing financing, underpinned by the combined distribution network.
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Some of HDFC’s old-timers may hang up their boots post the mergerIn an updated investor presentation, HDFC Bank expressed confidence that the combined entity will continue to grow and achieve its above industry growth.
Priority sector lending obligations
There is significant headroom for mortgage penetration, it further said, noting that of its 68 million customer base, 8 per cent have mortgages from other mortgage providers and about 2 per cent have HDFC’s mortgage product.
Meanwhile, priority sector lending obligations, post the merger of HDFC Ltd with HDFC Bank will kick in about 12 months after the merger is effective.
For instance, if the merger is effective from the third quarter of 2023-24, the incremental PSL obligations will be reckoned in 2024-25.
“HDFC Bank’s ability to generate organic PSL will improve as it will be able to make available the home loan product in the deeper geographies, where the home loan product is not being delivered currently,” it said on the impact of the merger on PSL.
The cash reserve ration would be met from Day 0 of the merger becoming effective.
Meanwhile, subject to the developments from now to effective date, excess statutory liqudity ratio, if available may help to meet the SLR requirement of the combined entity
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