HDFC Bank-HDFC Merger: Analysts React
The merger will be positive in the long run, said analysts.
HDFC Bank Ltd. and HDFC Ltd. are set to merge to create a financial sector behemoth with more than Rs 25 lakh crore in assets. The merger, long speculated, has been announced at a time regulations for banks and housing finance companies have been slowly harmonised.
The swap ratio has been set as follows: For every 25 shares of HDFC with face value of Rs 2 each, investors to get 42 shares of HDFC Bank with face value of Re 1 each.
Early views from analysts suggest the merger is a long-term positive.
Macquarie Research
HDFC, HDFC Bank merger will create a BFSI behemoth.
Merger will widen the product coverage of HDFC Bank.
Merger is likely to have major implication for the financials sector as it increases competitive intensity.
The technical gains from FII headroom expansion may be limited.
The RBI's approval for the merger bank will be a key monitorable as the bank will own 48% in Life, 50% in general insurance and 69% in the AMC entities of the group.
Expects the merger to solve the management succession problem at HDFC to a great extent.
Refinancing HDFC Ltd.'s funding with low-cost deposits will be crucial for the success of the merger.
Expects HDFC Bank's effective CASA to fall to 35% from 47% post merger.
S&P Global Ratings
HDFC Bank is likely to get a booster shot after merger with HDFC.
HDFC Bank's market share is expected to rise while revenues are likely to diversify post the merger.
HDFC Bank will remain the second-largest bank in India post merger, but it will be twice the size of ICICI Bank.
Merged entity will have one-third of its portfolio in mortgage loans compared to 11% now.
Earnings of the combined entity could improve over next three to five years as the merger will provide HDFC Bank with profitable cross-selling opportunities to HDFC's customers.
Expects the merger to improve the ability of the merged bank to raise funds at competitive rates.
Efficiency gains will depend upon the smooth integration of systems and processes.
Profitability could be affected in the short term due to statutory reserve requirement and priority sector lending regulations.
HDFC Bank should be able to absorb incremental risks from HDFC's portfolio, which comprises loans to real estate developers, given its adequate capital and provisioning buffers.
Jefferies
HDFC's planned merger into HDFC Bank will expand the loan book by 40% and the combined market cap will rise to $160 billion.
Expects the merger to be completed in 18 months.
Opening of 700-basis-point headroom for foreign investors is a positive.
Expects the merged entity to have better scope for cross-sell across customers.
Management expects that RBI will allow HDFC Bank to become the parent organisation for subsidiaries like HDFC Life, HDFC Ergo GI, HDFC AMC and others.
JM Financial Research
HDFC and HDFC Bank have announced merger in the ratio of 0.6:1. Values HDFC at about 4% above Friday’s closing price.
Will entail issuance of 1,877 million shares by HDFC Bank (cancellation of HDFC stake in the bank) and a dilution of 25% for the bank on a post-issuance basis.
Total combined loan book Rs 18.11 lakh crore with mortgages forming 27% of the loan mix.
Compliance with priority sector loans, cash reserve ratio and statutory liquidity ratio can be sizeable drags on the balance sheet of the bank.
Ashutosh Mishra, Head of Research- Institutional Equity, Ashika stock Broking
“The merger is a long-term positive. For now, the initial merger ratio appears more favourable to HDFC. When valuing HDFC, we were building in a holding company discount that’s not reflected in the swap ratio.”
Emkay Global Financial Services
Merger will be beneficial for HDFC as the mortgage business leverage will go up leading to better return on equity adjusted for regulatory cost and will be valued higher in the bank.
The bank will benefit in terms of balance sheet size/market share but will be margin dilutive given higher share of mortgage business. Risk adjusted margins will still be positive.
All non-lending subsidiaries will be merged in the bank and thus as per the RBI norms, bank will have to dilute stake mainly in the insurance businesses to 30% for which the RBI would give time.
This merger will pave the way for holding structure norms from the RBI as NBFC owning a bank was one of the hurdles. As per the norms, the non-lending business will have to be outside the bank, under the holding company.
This would have repercussions for other banking conglomerates like Kotak, ICICI, SBI and Axis.
Shivaji Thapliyal, Lead Analyst – Institutional Equities, YES Securities
The combined cash reserve ratio and statutory liquidity ratio requirement of 22% for banks is less onerous now. Also, HDFC has Rs 800 billion (Rs 80,000 crore) worth of non-convertible bonds which, due to affordable housing status, would not attract CRR, SLR requirement.
A deep priority sector lending certificates market makes it more straightforward for the combined entity to meet the increased PSL requirement due to bringing the HDFC loan book on board.
HDFC’s business, sitting inside the combined entity, will now have access to HDFC Bank’s low-cost funding franchise.
The combined entity will benefit from HDFC's expertise in conducting specific lending businesses, which it has been executing with low cost to income ratio.
Cross-sell opportunities and other synergies: About 70% of HDFC customers do not bank with HDFC Bank, indicating significant opportunity and about 80% of HDFC Bank customers do not have mortgages, indicating low penetration.
Capital adequacy: Any amount invested by HDFC into HDFC Bank is reduced from Tier 1 capital, which has a negative impact on HDFC return on equity. Any future infusion of capital by HDFC into HDFC Bank to maintain stake would have resulted in a drag on HDFC RoE.
Holding company discount: The deal would do away with holding company discount applied on HDFC's investments.
Larger balance sheet: The combined entity would have a larger balance sheet and would be able to make larger ticket loans including in the infrastructure space.
Samir Bahl, CEO, Investment Banking, Anand Rathi Advisors
“This is India's largest and most transformational merger in the Indian financial services sector. 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, very sticky client base. The combined entity will be able to extract substantial synergy benefits which bode well for all stakeholders and shareholders. We are already seeing that in the market reaction to this unprecedented announcement today.”
Motilal Oswal Financial Services
Post-merger, HDFC. will hold 41% stake in HDFC Bank. This shall enable the bank to build its housing loan portfolio and enhance its existing customer base.
The bank has also reported robust loan growth in 4QFY22, led by a healthy revival in Retail loans. The commercial banking and corporate segment too saw strong traction, which will likely support growth in PPOP.
The margin trajectory is expected 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%.
Maintains 'Buy' with a target of Rs 2,000 per share, a potential upside of about 21% from the prevailing levels.
Binod Modi, Portfolio Manager – PMS, Sharekhan by BNP Paribas
The merger offers an edge to HDFC considering elimination of holding company discount, possible improvement in cost of funding and strong cross-selling opportunities post deal.
Still, ambiguity about quantum increase in cost in the bank book in terms of integration costs and additional regulatory costs might not lead to valuations re-rating in HDFC Bank in the near term.
Automatic increase in PSL book, 7-8% headroom creation for FPIs investments and technology advancement augur well for HDFC Bank in the medium term perspective.
Large distribution network of HDFC Bank is expected to aid subsidiaries’ businesses like insurance and AMCs in a better way.