India’s largest housing finance company HDFC is to merge into HDFC Bank, India's largest private sector bank by assets with a market cap of nearly ₹8.35 lakh crore.
“This is a merger of equals. Over the last few years, various regulations for banks and NBFCs have been harmonised, thereby enabling the potential merger. The resulting larger balance sheet would allow underwriting of large ticket infrastructure loans, accelerate the pace of credit growth in the economy, boost affordable housing and increase the quantum of credit to the priority sector, including credit to the agriculture sector," said Deepak Parekh, Chairman HDFC Limited.
Read here the details of the HDFC-HDFC Bank merger
Last week, Axis Bank announced it was taking over Citi's retail business. These two are extremely significant developments that India's banking sector has witnessed in the last few days week.
Both these transactions are not only significant for the respective companies only but also for their customers and for the overall retail banking ecosystem of the country.
While the Citi transaction would help Axis Bank gain access to 2.6 million Citi cards, which have a greater average expenditure than cards from competing Indian banks, analysts see the HDFC-HDFC Bank merger as 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," said Samir Bahl, CEO, Investment Banking at Anand Rathi Advisors.
The bigger the better
The merger of banks and acquisition of new businesses by them is not a new thing for India or the world. Banks merge to increase their market share, bring in more efficiency in their operations and reduce competition.
The merger of HDFC and HDFC Bank is a step in the right direction as the sector is facing fresh sets of challenges owing to the emergence of fintech and new small banks.
Read here the rationale behind the HDFC-HDFC Bank merger
As per media reports, India is home to the world's third-largest ecosystem in the world and the country's overall fintech market opportunity is estimated to be $1.3 trillion by 2025. Fintech is eating up banks' market share and profit as the technologization of the financial system has made it easier for fintech to start operations and spread rapidly.
For larger players like HDFC Bank and Axis Bank, analysts point out it is important to increase their market share and consolidate their business to cater to their customers while maintaining their margins in a highly competitive environment.
"Two big developments that happened over the last one week will benefit the Indian banking sector as a whole. HDFC and HDFC Bank merger will benefit both the companies and the shareholders as they would be able to use each other’s strengths to their advantage. Similarly, Axis bank would be able to use Citi Bank's retail business to increase its profits and widen its retail business," said Animesh Malviya, Banking Analyst at CapitalVia Global Research.
The sector is witnessing lots of changes in terms of technological advancement and consumer behavior too as the banking penetration among the population has attained an almost near-optimal level.
After the consolidation of some public sector banks, private banking players are also exploring ways to strengthen their business.
"Consolidation of public sector banks (PSBs) has led to the emergence of eight large PSBs. They are likely to slowly start intensifying their competition with the private banks. Post-major consolidation, the PSBs could opt for equity dilution to invite private stakeholders and also likely to attract successful leadership at the helm," G Chokkalingam, Founder, Equinomics Research & Advisory, pointed out.
The merger is one way to remain stronger in a highly competitive market. Banks are also adopting other methods to meet the shift in consumer bahaviour.
Mint reported a few weeks ago that several large banks are creating their own version of challenger banks to take on fintech startups and cater to the need of India’s tech-savvy millennial population. For example, State Bank of India (SBI), is planning a separate digital entity and will revamp its current mobile application, rechristening it ‘Only Yono’ as part of its decision to be future-ready, said the report.
Increasing competition is increasing pressure on the net interest margins (NIMs) of banks. Banking players are also struggling with faltering credit growth. In fact, lending rates on fresh loans have been volatile over the past few months.
As per Kotak Securities, in the past six months, fresh lending rates have declined for PSU banks but stayed flat for private banks. The gap between fresh lending rates of private and PSU banks stands at nearly 160 bps. The gap between outstanding and fresh lending rates has declined steadily and now stands at nearly 100 bps.
"Bond yields seem to be trending upwards now. In recent months, we note that term spreads and credit spreads in the bond markets have declined from peak levels, suggesting that expansion of NIM on the corporate book is unlikely going forward. While rising benchmark rates will support yields in the medium term, increasing competition can play spoilsport resulting in NIM pressure," Kotak said.
For banks, like other companies, it is important to grow in size and volume to keep the competitors subdued.
Santosh Meena, Head of Research, Swastika Investmart, said this is a marriage made in heaven, creating increased scale, comprehensive product offering, balance sheet resiliency, and the ability to drive synergies across revenue opportunities, operating efficiencies, and underwriting efficiencies, hence benefiting stakeholders of both the companies.
Ajit Kabi, a banking analyst at LKP Securities sees the amalgamation between HDFC Bank and HDFC as a fruitful deal for both parties.
“We expect the technological platform to be well synchronized and shall enable the bank to build a larger housing loan portfolio. The proportion of unsecured loans will be narrowed down and it will drag down the risk weight, hence improvement in the capital buffer. Despite the larger housing book, the NIMs are likely to stay stable with the bank’s aggressive approach to building a low-cost CASA deposit. The valuation at 4 times is still attractive after double-digit single-day growth. We believe it’s a win-win situation for both shareholders,” said Kabi.
Animesh Malviya, Banking Analyst at CapitalVia Global Research believes the merger will improve the amalgamated entity's ability to cross-sell banking and housing finance products.
“We believe that it will help both companies to increase their profitability as they would be able to use each other’s strengths to their advantage. Shareholders will also have an advantage as the share prices will increase and the companies will be more profitable,” said Malviya.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.