HDFC Bank + HDFC — A Formidable #2

The merger of HDFC Bank and HDFC, once concluded, will change the competitive landscape for India's financial services sector.

<div class="paragraphs"><p>Jockeys ride horses at a race course. (Photographer: Brent Lewin/Bloomberg)</p></div>
Jockeys ride horses at a race course. (Photographer: Brent Lewin/Bloomberg)

The merger of HDFC Bank and HDFC Ltd., once concluded, will change the competitive landscape for India's financial services sector.

The bank, which is already the second largest in India, will widen the gap with its nearest competitors post the merger. It will also bring mortgages, insurance and asset management into its fold, thereby leveling the competitive landscape with peers like ICICI Bank Ltd.


With close to Rs 17.86 lakh crore in advances, HDFC Bank will still be the second largest in the banking sector after State Bank of India, which had advances of Rs 26.64 lakh crore as of the December-ended quarter.

The bank's market share, according to a note by S&P Global Ratings, will rise from 11% to 15%. SBI has a market share of 25.8%.

“While HDFC Bank will remain the second-largest bank in India post-merger, it will be twice the size of ICICI Bank, the third-largest bank in the country," said S&P Global Ratings. HDFC Bank's larger balance sheet could enhance its wholesale lending opportunities, S&P added.

Larger Share Of Mortgages

Post merger, HDFC Bank will also have a larger share of mortgages in its portfolio.

From 11% at present, the share of mortgages will rise to 33% in the combined portfolio. This compares to 20.2% for State Bank of India and about 34% for ICICI Bank.

Besides, HDFC's distribution and expertise in the home loan market will benefit the combined entity considerably.

“With this merger HDFC Bank gets an unparalleled advantage through the mortgage portfolio providing it a quantum leap in distribution to semi-urban and rural areas with a huge opportunity to cross sell bank products to a very sticky client base,” said Samir Bahl, CEO (investment banking) at Anand Rathi Advisors.

The higher share of mortgages will have both upsides and downsides. While it will bring with it lower credit costs, it will also bring down HDFC Bank's margins which have been steady between 4% and 4.5%.

Sashidhar Jagdishan, chief executive of HDFC Bank, said margins could move into a range of 3.7-4%. This would be closer to ICICI Bank's 3.95% for the nine months ended December 2021. However, it would still be higher than the 3.3% that SBI has been averaging in recent quarters.

Return On Equity

The merged entity will also likely have a lower return on equity.

According to a Macquarie report dated April 5, the combined entity's RoE will go down by 200-250 basis points, due to higher statutory and priority sector requirements and the lower RoE of HDFC's business. "The impact could be cushioned in case there is grandfathering of requirements," Macquarie said.

This would bring HDFC Bank's so-far superior RoE to close to 14%. This would be on a par with ICICI Bank's RoE of 13.9% for the nine months ended Dec. 31, 2021. For SBI, RoEs, which were depressed for sometime, rose sharply to 14% in the third quarter.


HDFC Bank will also finally have a host of non-lending businesses in its fold, if regulatory clearances come through. Unlike its peers like SBI and ICICI Bank, HDFC Bank did not have insurance and asset management businesses under it as those were held by the parent company.

“Post merger, the new organisation will have a similar structure as SBI, ICICI Bank and Kotak Mahindra Bank, which all have various financial businesses through subsidiaries," said Asutosh Mishra, head of research (institutional equity) at Ashika Stock.

“On the face of it, the bank will get the benefit of a more aligned group structure with better capital allocation and cross selling opportunity. We see the pain of the CRR and SLR is worth-taking given the advantages the combined organisation will enjoy,” added Mishra.

“No other large bank within the PSU or private space had this structure as these players were already offering all products under the bank directly,” Bahl added.

The merger will make HDFC Bank more competitive in terms of its offerings, its footprint and higher monetisation opportunities from existing clients. “It will become a one stop solution for HDFC customer banking requirements including loans, savings, deposits and investments,” said Bahl.

The Competitive Landscape

The gap between the top two players and the others has significantly widened, said Amit Tandon, founder and managing director of IiAS. This will make the others look around to see whether there are opportunities in the market. "But there aren't very many opportunities."

"The advantage of a larger bank is that they are better placed to ride economic cycles," said Ashvin Parekh of Ashvin Parekh Advisory Services. On the flip side, agility is becoming more and more important, he said." How well a bank works with the changing economic system is where agility in. There size could be a huge advantage but it could be drag as well," Parekh said.