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Prabhudas Lilladher Report
The Indian banking space witnessed a historic event today with Housing Development Finance Corporation Ltd. deciding to merge into HDFC Bank Ltd. and the transaction would take ~18 months to complete.
The rationale of the merger is that regulatory arbitrage between banks and non-banking financial companies has been reducing while the time was opportune owing to a softer interest rate environment coupled with lower liquidity requirements.
As at December 2021, the total loan size of the merged entity would be ~Rs 18 trillion with the share of mortgages expected to increase from 11% to 33%.
Since a chunk of HDFC's customers do not have a banking relationship, this would provide tremendous cross-sell opportunities. While the merger makes sense in terms of scale, we are watchful that margins could compress post the merger which could be a drag on the return on equity.
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