HDFC's merger to be booster shot for HDFC Bank, diversify its revenues: S&P

Profitability could to take hit in the short run

Standard and Poor’s (S&P) on Monday said the planned merger of mortgage major HDFC with HDFC Bank will boost the India-based bank's market share and diversify its revenues. However, the profitability in the shorter term could be hit due to statutory reserve requirements and priority sector lending regulations, the rating agency said.

The combined entity's capitalization and asset quality to be broadly in line with those of HDFC Bank on a stand-alone basis. About nine per cent  of HDFC Ltd's portfolio comprises loans to real estate developers, where the asset quality is weaker than for the rest of the bank's portfolio.

HDFC Bank should be able to absorb incremental risks from this portfolio given its adequate capital and provisioning buffers, S&P said.

Besides, the benefit from economies of scale, merger will improve ability to raise funds at competitive rates. The combined entity's earnings could improve over the next three to five years.

The planned merger is likely to raise private sector lender’s loans by 42 per cent to Rs 18 trillion ($ 237 billion) and enhance market share from 11 per cent to 15 percent.

It can also leverage HDFC Bank's digital capabilities and distribution network to drive operational efficiencies. The efficiency gains will depend on smooth integration of systems and processes.

The merger will provide the bank with profitable cross-selling opportunities to HDFC’s large pool of customers, especially for high-yield products such as unsecured loans. It would also generate more fee income from insurance and investment products.

HDFC Bank's larger balance sheet could enhance its wholesale lending opportunities. While HDFC Bank will remain the second-largest bank in India post-merger, it will be twice the size of ICICI Bank Ltd, the third-largest bank in the country.

The business profile will diversify after the merger. The merged entity will have one-third of its portfolio in mortgage loans, compared with a reported 11 per cent now. HDFC Ltd's mortgage portfolio largely comprises individual housing loans, it added.