The merger of HDFC and HDFC Bank “is an opportunity we cannot afford to miss,” offering possibilities of bundling consumer durables finance with home loans and taking bigger exposures to leading corporates, among others, according to HDFC Bank Chief Sashidhar Jagdishan.

“We believe that the runway is huge, and we can potentially add an HDFC Bank every five years,” Jagdishan said in the latest annual report.

The bank plans to nearly double its network in the next three to five years by opening 1,500 to 2,000 branches every year.

HDFC and HDFC Bank (India’s largest private sector bank) announced a mega merger on April 4, 2022, which is subject to various regulatory approvals and will take effect in about 15- 18 months.

Delineating the rationale for the merger, Jagdishan said: “Only 2 per cent of our customers source their home loans through us, while 5 per cent do it from other institutions. The latter is equivalent to the size of our retail book. Home loan customers typically keep deposits that are 5 to 7 times those of other retail customers.

“And about 70 per cent of HDFC Ltd.’s customers do not bank with us. All these give us an idea about the size of the opportunity. The long-term nature of home loans provides resiliency to the balance sheet. “

“We can easily bundle this with a home loan, as with every home loan, there is a propensity for a customer to take new consumer durables. It is this kind of bundling that will increase margins. “

“With the advantage of a lower cost of funds and the phenomenal distribution muscle that we have built, it is imperative that we seize this (merger) opportunity,” HDFC Bank chief said.

Favourable factors

For the merger, Jagdishan referred to other favourable factors, including the regulatory arbitrage between banks and NBFCs coming down substantially in the last few years.

“Today reserve requirements have come down to about 22 per cent from 26 per cent. Both institutions are well capitalised and have surplus liquidity and a strong portfolio of investments in government securities, “he said.

He noted that the increase in priority sector lending (PSL) the bank needs to do due to the merger is possible now with its own increased focus on MSMEs, the affordable housing loans that it can make and the well-developed PSL certificate market.

“All this means that on the day of the merger, there may not be any need to raise further funds to meet reserve requirements. The addition of the home mortgage portfolio to our balance sheet makes it more diversified and robust,” Jagdishan said.

Key focus area

Per the report, the key focus area for the bank to absorb this growth opportunity is to secure enhanced liabilities to fund future growth.

“The branch network has been a key deposit mobilisation engine during its 27 years of growth. The density of branches for the population of this country is way below that of OECD countries.

“This is where our branch banking strategy comes in. Today, we have 6,000 plus branches across India, and we plan to nearly double our network in the next three to five years by opening 1,500 to 2,000 branches every year,” the HDFC Bank Chief said.