The HDFCs, a fusion for champions

To date, the question about HDFC’s merger with HDFC Bank has been: why haven’t they done it already? India’s largest mortgage lender has benefited from the cheap money the country’s largest private bank is raising as customer deposits. By handing over its mortgage business to HDFC, its sister bank has made its retail loan book sweat more than necessary. It could always take a bigger balance sheet to write bigger credit checks. The two barely overlap when it comes to customers, and the opportunity to sell services from insurance to mutual funds in a financial supermarket was huge. And HDFC’s commitment to affordable housing and microcredit has facilitated its loan book to meet HDFC Bank’s development finance requirements.

Why is it merging now? Simple answer: The regulatory arbitrage between Indian banks and shadow banks is about to end. The policy intent behind raising the regulatory bar was for non-bank financial corporations (NBFCs) to shoulder an excessive share of infrastructure debt. At this point in the interest rate cycle, HDFC should find it easier to adjust to a bank’s liquidity needs. The cost of the merger was reduced by new reporting and reserving rules for NBFCs. Even central technology platforms have been aligned. A merger is now expected to benefit from deleveraging Indian companies and a consolidating banking industry preparing for an investment super cycle.

The logic of the merger and the earnings potential become inevitable if HDFC Bank does not have to pay a premium on the market price for a very well run family business. Market cap sweepstakes gains may not immediately extend to inclusion in indices tracked by passive overseas portfolio investors. But the deal structure opens up scope for international investments. Domestic institutions may have to reduce their holdings in the combined entity. Still, a large portion of the additional household savings flowing into the stock market will continue to end up at the counter of HDFC Bank. The HDFCs, a fusion for champions

Russell Falcon

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