RBI circular overhang weighs on the HDB Financial Services valuation

IPO valuations likely to be $7.2 bn, down from $10 bn eyed earlier

HDFC Bank, India’s largest private-sector lender, has likely settled for up to 30 per cent lower valuation than estimated earlier for its non-banking financial services (NBFC) arm, HDB Financial Services, whose initial public offering (IPO) opens on June 25, investment banking sources said. 

The lender was initially eyeing a valuation of $10 billion (₹86,000 crore). However, it has agreed to sell the shares at $7.2 billion (₹62,000 crore). This is due to an overhang created by a draft Reserve Bank of India (RBI) circular requiring banks to reduce their stakes in NBFC arms engaged in similar activities to 20 per cent, they added. 

According to a stock-exchange filing by HDFC Bank on Thursday, the ₹12,500-crore IPO — the largest by an NBFC in the domestic market — will open for subscription on June 25 and close on June 27. The final valuation and issue price are expected to be announced on Friday. 

An email query sent to HDFC Bank and HDB Financial remained unanswered till the time of going to press. 

Valuation expectations are not formal and change depending on market conditions and business developments. “The deal has not been as easy as expected. The RBI’s norm mandating banks to divest their holdings in their NBFC arms has been a major pain point during roadshows. As this will create a share sale overhang, investors are seeking lower valuations,” said an investment banker handling the share sale. 

At present, HDFC Bank holds a 94.36 per cent stake in the firm. This is expected to reduce to about 70 per cent after the IPO. If the RBI draft regulations are implemented, HDFC Bank may have to divest another 50 per cent over the next few years, which will lead to a supply overhang. 

Another investment banker dealing with the IPO said, besides the proposed RBI norms, margin pressure due to intense competition and growth slowdown amid NBFCs’ asset quality concerns also weighed on the valuation. 

“Earlier, we were eyeing an issue price of around ₹1,200. We may now have to settle below ₹800 following investor feedback. To be sure, there is a lot of investor interest. The bank, if it wants, can still price the issue aggressively, but it wants to leave some gains on the table for investors,” he added. 

HDB Financial had filed its draft red herring prospectus (DRHP) with the Securities and Exchange Board of India (Sebi) on October 30, 2024, but received regulatory approval only in June. The delay was due to compliance issues, such as a potential breach of norms related to share issuances by unlisted companies. 

The IPO comprises ₹2,500 crore of fresh issuance and ₹10,000 crore of secondary sale by HDFC Bank. 

In October 2024, the RBI had released draft norms “Forms of Business and Prudential Regulation for Investments”, which proposed capping banks’ stake in NBFCs performing similar activities at 20 per cent. Sources said several banks had requested the central bank to relook at the issue. 

“The draft RBI regulations on the overlap of similar businesses create an overhang and could thus affect HDB,” Macquarie had said in a note earlier this year. 

HDB Financial has almost ₹1 trillion of assets under management. This is lower than other NBFC peers, such as Bajaj Finance (₹2.75 trillion), Cholamandalam Investment and Finance (₹1.6 trillion), M&M Finance (₹1.12 trillion), and Shriram Finance (₹2.4 trillion). 

HDB Financial’s gross non-performing assets (NPA) ratio, which was 1.9 per cent at the end of FY24, rose to 2.10 per cent by the first half of FY25. Its unsecured loans are over a fourth of its total loan book. Banks and NBFCs have seen their asset quality on unsecured loan portfolios deteriorate in the last one year.