HDFC Bank 1994 + five banks + HDFC = HDFC Bank 2023

The merger will push the bank's retail loan, as well as the secured loan portfolio and lengthen the average maturity profile of loans

On February 26, 2000, Times Bank Ltd merged with HDFC Bank Ltd. It was the first friendly merger in the Indian banking space and the first through a share-swap route. It catapulted HDFC Bank into the big league in terms of business as well as market valuation.

This was an appetiser for HDFC Bank. The main course would arrive eight years later. In February 2008, the boards of HDFC Bank and Centurion Bank of Punjab Ltd (Centurion BoP) agreed to take the plunge and effect the biggest merger in Indian banking history then.

Centurion BoP was four banks in one, having acquired three banks in a row: The Indian operations of Bank Muscat in 2003, Bank of Punjab Ltd in 2005 and Lord Krishna Bank Ltd in 2007.

Staying with the meal analogy, the merger with the Housing Development Finance Corporation Ltd (HDFC) is the dessert.

This, though, is not the biggest merger on the Indian financial turf. The State Bank of India (SBI) merging its five associate banks with itself in April 2017 and some mergers among public sector banks — we have 12 government-owned banks now, down from 27 in the last decade — have created bigger banks by assets. But going by the market value, this is the largest.

On Friday, the combined market capitalisation of HDFC Bank and its promoter, the pioneer in the mortgage market, was Rs 14.67 trillion — more than half of all listed banks put together and about one-and-a-half times the market cap of all government-owned banks. Globally, this is the fourth-largest among banks.

The merger had been on the cards forever. The bank’s investors have always been keen that it sell home loans to complete the suite of retail products, but HDFC had reservations about the duplication of business.

There was also the matter of the high cost of regulations such as the statutory liquidity ratio (SLR) or the mandatory investment in government bonds by a bank; cash reserve ratio (CRR) or the portion of deposits a bank needs to be keep with the Reserve Bank of India (RBI) on which it does not earn any interest; and priority sector lending (PSL). Forty per cent of a bank’s loan must flow into agriculture, small industries, low-cost housing, the weaker section of society, et al.

The cost of regulation has fallen: SLR is now 18 per cent and CRR 4.5 per cent. More importantly, the arbitrage between banks and non-banks, including housing finance companies (HFCs), doesn’t exist anymore with the RBI bringing in scale-based regulations. In the new regime, HDFC has to keep enough liquidity buffer. The asset-classification norms for both banks and non-banks are also on a par now.

In other words, being an HFC has no advantage. So, why not make HDFC Bank bigger and stronger by merging the parent with it? This seems to be the logic behind it.

What will the bank look like after the merger?

Going by the March 2023 balance sheet, HDFC Bank will now have an asset base of Rs 31.94 trillion — more than double the size of ICICI Bank Ltd (Rs 15.84 trillion), the second largest private bank, but much smaller than the country’s largest lender, SBI (Rs 55.16 trillion).

Its mortgage book will be Rs 6.71 trillion (minus the corporate loans) — the largest in the industry. The comparable figure for SBI is Rs 6.41 trillion and ICICI Bank Rs 3.45 trillion.

Post the merger, the proportion of corporate and retail loans will shrink from 58:42 to almost 50:50. Also, as more mortgage loans find their way into the bank’s balance sheet, the proportion of unsecured loans will reduce to 7 per cent from 11 per cent of the total book and from 27 per cent to 15 per cent of its retail loan book, adding resilience to its balance sheet and potentially bringing down the credit cost. It will also increase the size of the average maturity of HDFC Bank’s loans since a mortgage loan runs for six years on an average.

The bank will have to meet the SLR and CRR requirement immediately, but the RBI has given it three years to meet the PSL target. The other preconditions of the merger are HDFC Bank holding 50 per cent stake in its life and non-life insurance companies and HDFC bringing down its stake to below 10 per cent in the education loan NBFC, HDFC Credila Ltd.

HDFC was founded in October 1977 on the lines of UK’s building societies and the savings and loans associations of the US. It has been a one-product institution, holding 21 per cent in HDFC Bank. The bank, in turn, holds 100 per cent in another non-bank — a bit odd in the Indian financial sector’s makeup. The merger has addressed this anomaly.

The market had been speculating on a possible merger of HDFC with the bank ever since ICICI Ltd, the project finance institution, merged with ICICI Bank in 2002. The context of that merger was different though.

ICICI was crumbling under huge asset–liability mismatches. Its survival in a changing environment was becoming increasingly difficult as the inherent cost advantage that such institutions enjoyed by virtue of their access to long-term cheap funds was disappearing and commercial banks were getting into project financing in an aggressive way. The regulator was pulling down the wall that separated financial institutions from banks. Two years later, in 2004, IDBI Ltd too merged with IDBI Bank Ltd for similar reasons.

The provocation for this merger is very different. There has been just 2 per cent mortgage penetration among HDFC Bank’s 83 million customers. Post-merger, it will have 88.4 million customers. The merged entity’s nearly 8,344 outlets across 3,500-odd cities and towns will help its 177,000-plus employees to hawk home loans, shaking up the mortgage market. Many may be forced to redraw their plans.

HDFC Bank’s stock started hitting the circuit breaker almost every day after the merger of Times Bank with it was announced. Between November 26, 1999, when the merger was announced, and February 26, 2000, when it took effect, the stock rose from Rs 98.90 to Rs 227.50.

The market reacted to the merger with Centurion BoP differently. The stock tanked as the investors rushed to sell on concerns that HDFC Bank had paid too much for Centurion BoP. On the day the share swap ratio was announced, Centurion BoP shares, which had gone up in anticipation of the merger, tanked 14.5 per cent, and those of HDFC Bank fell by 3.5 per cent. The investors took time to digest the merger and reward the bank.

We need to wait and watch how the investors behave this time around. The merger will complete the suite of products for the bank and make it bigger and stronger, which has many advantages. 

And since it’s a family affair, Red giving way to Blue (the colour of their logos) should be a smooth affair. There shouldn’t be any blues for the investors. 

The writer is an author and senior advisor to Jana Small Finance Bank Ltd. His latest book is 'Roller Coaster: An Affair with Banking'
 

To read his previous columns, log on to https://bankerstrust.in
 

Twitter: @TamalBandyo