India’s HDFC Bank Adds Mortgage Lender in $60 Billion Deal

The transaction is the second-largest in the world this year.

India’s HDFC Bank Adds Mortgage Lender in $60 Billion Deal
Information leaflets are displayed at a Housing Development Finance Corp. (HDFC) bank branch in Mumbai, India.[Photographer: Dhiraj Singh/Bloomberg]

India’s most valuable bank agreed to take over the country’s largest mortgage lender in a deal valued at about $60 billion to ride a boom in home loans and consumer spending in the world’s fastest-growing major economy.

HDFC Bank Ltd. is making an all-stock offer for 100% of Housing Development Finance Corp., which offers loans to more than half the home buyers in a country of 1.4 billion people. The transaction is the second-largest in the world this year.  

“The biggest motivation for the deal is creating demand in the housing market as our penetration in this segment is very low,” Sashidhar Jagdishan, chief executive officer of HDFC Bank said at a press conference. “We are losing our customers to other banks.”

The deal to unite two companies with a combined market value of almost $190 billion follows a proposal by the banking regulator for large non-banking finance companies to convert into banks to avoid a repetition of the nation’s massive shadow lending crisis in 2018. India’s emergence from the pandemic and an improvement in the labor market has helped boost consumer demand and improve lenders’ retail portfolios.  

Shares of the two Mumbai-based companies surged on the announcement. HDFC soared as much as 20% before paring gains, while HDFC Bank closed 10% higher. HDFC has 6.23 trillion rupees ($82.3 billion) in assets and a $66 billion market capitalization as of Monday. The bank has 19.38 trillion rupees in assets and a market value of about $120 billion, higher than Citigroup Inc.

India’s HDFC Bank Adds Mortgage Lender in $60 Billion Deal

“We think the proposed merger may reduce HDFC Bank’s exposure to unsecured loans and bolster its capital base,” said Bloomberg Intelligence analyst Rena Kwok. Despite HDFC Bank’s low unsecured loans exposure, it had been growing its credit cards and personal loans aggressively to improve interest margins, she said.

The Reserve Bank of India has been seeking tighter controls on the shadow lending sector while gradually lowering the reserve requirements of traditional banks, narrowing the gap with shadow lenders. With those regulatory advantages gone, it made more sense to merge the mortgage lender with its affiliate bank, said HDFC Chairman Deepak Parekh. 

“As the son grows older, he acquires the father’s business,” Parekh said.

The merger could improve the entity’s earnings over the next three to five years, said S&P Global Ratings, solidifying its ranking as the second-largest bank in India, twice the size of No. 3 ICICI Bank Ltd.

“HDFC Bank’s larger balance sheet could enhance its wholesale lending opportunities,” the ratings firm said.

Once the deal is complete, HDFC shareholders will get 42 shares of HDFC Bank for 25 shares held. HDFC’s existing shareholders will own 41% of the combined entity, according to a filing on Monday.  

India’s HDFC Bank Adds Mortgage Lender in $60 Billion Deal

“I think it’s a good thing for the Indian banking system” Duvvuri Subbarao, former governor of the Reserve Bank of India, said on Bloomberg TV.

Read: Grow Into Banks or Cut Business, RBI Tells Indian Shadow Lenders

Other key details:

  • The merger is expected to be completed by third quarter of financial year 2023/2024
  • Merger will open up an additional 7% space for foreign portfolio investors into HDFC Bank: HDFC CEO Keki Mistry
  • HDFC Bank has sought time from RBI to meet minimum reserve regulatory requirements for merged entity: Mistry
  • HDFC Bank’s CEO Jagdishan will head the merged entity

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