HDFC, HDFC Bank merger: Analysts see banking industry consolidating

The banking sector, according to analysts at ICICI Securities, has been underperforming at the bourses against the overall market in the last six months largely due to credit growth concerns

The merger of HDFC and HDFC Bank can trigger a consolidation in the banking industry, feel analysts. Barely a few days after Axis Bank took over the Indian consumer business of Citibank, India's largest private lender HDFC Bank announced that it will merge with housing finance firm HDFC Ltd.

As part of the deal, shareholders of HDFC Ltd will receive 42 shares of the bank for 25 shares held. Existing shareholders of HDFC Ltd will own 41 per cent of HDFC Bank. Shares held by the housing finance company in the lender will be extinguished, making HDFC Bank a full-fledged public company.

Analysts say that the merger of HDFC and HDFC Bank can trigger a wave of consolidation in the banking industry. G Chokkalingam, founder and chief investment officer at Equinomics Research, for instance, suggests that the banks and the industry as a whole can grow bigger going ahead only if they consolidate and expects consolidation outside the core banking solution segment.

“It is important for the banks to grow inorganically via consolidation. There are three structural changes that are happening right now - small finance banks (SFBs) are getting into the banking industry, fintech companies are getting into the payment solution business and the public sector banks (PSBs) have also consolidated to some extent. These three structural changes along with the contraction in the bank credit growth leaves less room for players. So, consolidation will happen, especially in the non-banking space. HDFC has smartly consolidated its housing loan business with this move,” he said.

The banking sector, according to analysts at ICICI Securities, has been underperforming at the bourses against the overall market in the last six months largely due to concerns over subdued credit growth, risk aversion and uncertainty on accumulated stressed assets. The pandemic-led disruptions had halted the gradual progress on credit growth and delayed a swift recovery by posing asset quality challenges.

"Banks, especially larger peers, are gearing up for increased digital offering with either tie ups with fintech or in-house development. In our view, continued focus on digital offering will aid incumbents to face disruption challenges. Further, a new format of banking in the form of digital banking is gradually taking shape," the note said.

A K Prabhakar, head of research at IDBI Capital, on the other hand, feels banks with a strong technology base can increase their market share going ahead. The top five private banks in India, he said, have the best IT infrastructure in the banking segment and are poised for strong growth.

“Going forward, banking will be more of IT infrastructure and not much of core banking. Backed by IT, consolidation is the way forward for the banking sector. Banks that do not leverage this will remain laggards, or even perish. The merger of HDFC and HDFC Bank will give the combined entity an advantage in the housing finance business. In the banking industry as a whole, a lot of consolidation still needs to happen. On its part, the government has already started the process and has cut the number of PSU banks. Consolidation is the way forward for the banks to operate in India,” Prabhakar said.


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