HDFC Merger: Technical Gains From FII Scope Expansion May Be Limited: Macquarie at HDFC Bank-HDFC Merger

NEW DELHI: Macquarie said on Monday FII participation in HDFC bank would be nearly 66 percent after the merger, compared to the 74 percent cap and therefore there is a larger gap of 7-8 percent versus the current 4 percent for FIIs to hold the shares.

However, the inclusion of the merged HDFC Index inclusion may be difficult as MSCI India requires a larger FII margin (from the cap) for inclusion, it said.

“Technical gains from FII headroom expansion may be limited,” it said. The overseas brokerage firm said RBI’s approval will also be crucial as the bank will eventually own 48 percent of the group’s life insurance, almost 50 percent of its general insurance and 69 percent of its AMC units.

It noted that the central bank recently disallowed Axis Bank to directly own more than 10 percent of Max Life, and ICICI bank was asked to reduce its stake in ICICI Lombard to less than 30 percent.

Referring to the ICICI case, it was said that the bank underwent a similar group merger in 2002. CASA for ICICI (as a percentage of total funding) fell from 26 percent (FY01) to 9 percent in FY03 and recovered to only 30 percent by FY10.

“Refinancing HDFC Ltd’s funding with low-cost deposits will, in our view, be key to the success of the merger. HDFC Bank’s effective CASA could fall to 35 percent from 47 percent after the merger,” it said.

The brokerage firm said its rough calculations suggest HDFC Bank will have excess SLR/CRR asset needs of Rs. 70,000-80,000 and will also need an incremental farming portfolio of Rs. 90,000 (based on 18 per cent of borrowing) to fund the PSL -meet standards.

“These underperforming portfolios could weigh on the combined company’s income statement,” it said.

“While the merger will expand the bank’s product portfolio and cross-selling ability, we believe it will also weigh on its P&L due to PSL requirements and higher SLR/CRR requirements,” it said. HDFC Merger: Technical Gains From FII Scope Expansion May Be Limited: Macquarie at HDFC Bank-HDFC Merger

Adam Bradshaw

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