HDFC-HDFC Bank merger: Who benefits?

Analysts take divergent positions on which is the better company to bet if the merger happens

Despite managements of both the companies denying it, the buzz of a merger between HDFC and HDFC Bank refuses to die down. What triggered the talks in the first place was a RBI norm which removed reserve norms for affordable housing and infrastructure sector.

 

Adding more fuel to fire was an open statement by Keki Mistry, Vice Chairman and CEO of HDFC that ‘theoretically’ a merger is possible. He further said that the merger would be done at an appropriate time but there was nothing on the table currently.

 

But the stakes are high. A merger of HDFC and HDFC Bank would create the second largest financial entity in the country after SBI in terms of assets. Just adding the two balance sheets would create a loan book of Rs 5 lakh crore with the combined entity having assets of Rs 8 lakh crore.

 

Experts too have given their green signal on the merger as the combined entity will be bigger than the sum of parts. Ashvin Parekh, managing partner of Ashvin Parekh Advisory Services LLP and senior advisor on financial services at E&Y India has been quoted in a Business Standard article as saying "RBI's move makes a very good case for a merger between HDFC and HDFC Bank. On the one hand, the bank will be creating long-term liabilities for lending to the infrastructure segment, which is affordable housing in this case. On the other, it will bring in capital efficiency. A merger will also ensure the merged entity is able to meet many banking guidelines such as the one pertaining to promoter shareholding."

 

Analysts too feel that the merged entity makes sense but differ on how to play the merger.While some believe that betting on HDFC Bank is a better bet, others favour a position in HDFC.

 

Manish Chowdhury of IDFC Securities in an interview to CNBC TV18 said that the benefits of a merger will accrue more to HDFC Bank since the bank requires much lower priority sector assets as a lot of it, which is in HDFC’s portfolio would qualify for priority sector.

 

On the other hand, Suresh Ganapathy and Parag Jariwala of Macquarie Research feel that the merger would benefit HDFC rather than HDFC Bank. Their reasoning is that the share swap ratio will be in favour of HDFC in case the merger takes place.

 

Macquarie further argues that merger would be a better way out for HDFC as in the revised set of regulations, bond market competition would lift the cost of funds for HDFC. Also, other banks could even compete aggressively in the affordable housing lending market thus reducing lending yields. Further the merger would reduce foreign holding in the joint entity to 63 per cent. FII’s have touched their buying limit in HDFC Bank.

 

Merger talks between the two entities clearly shows how the market works in discounting future events. Even as the managements of HDFC and HDFC Bank have denied any merger talks, analysts have already started discussing on how to play the event. It is as though merger between the two is now only a matter of time and is no longer of question of whether it will ever happen.