04 April 2022 17:40:03 IST

India’s $168-b bank merger bets the house

The $110 billion HDFC Bank blew past its target’s $58 billion market capitalisation in the past decade and has grown into a full-service banking giant. Mortgages sold by HDFC Bank are processed and booked by its 21 per cent-parent, which also originates its own loans. The bank gets a commission and the option to buy back most of the loans it sources. Mortgages, currently about 11 per cent of the bank’s loan book, would rise to 33 per cent after the deal.

Barriers to a union reduced after a 2018 shadow-banking crisis prompted the regulator to bump up reserve liquidity demands on non-banks, bringing requirements closer to those for banks. The mortgage specialist’s non-convertible bonds can count as affordable-housing bonds, further reducing liquidity requirements. But the enlarged entity may still have to raise capital.

Preparing for a home-loan boom

Meanwhile HDFC Bank’s $191 billion of deposits offer a lower cost of funding for the target’s loans. And the buyer will benefit from the mortgage lender’s efficiency: HDFC Bank’s cost-to-income ratio is more than four times higher. There are cross-selling benefits, too: some 70 per cent of the bank’s 68 million customers don’t have a mortgage.

Housing represents a huge growth engine for the bank. In the year to March 2020, before the pandemic, HDFC Bank’s mortgage book grew almost 9 percentage points faster than its overall loan book.

The combined company’s advances would still be smaller than State Bank of India’s, and New Delhi wants bigger lenders that can underwrite much-needed larger-ticket infrastructure projects. That might persuade the regulator to look past it owning big stakes in insurance and asset-management subsidiaries.

There are softer benefits, too. Cancelling the parent’s stake in HDFC Bank will free up room for more foreign investors to buy the stock, currently valued at three times forward book value, helping to prop up the price. A deal solves a succession issue as well: the parent’s long-time chief executive will be near retirement age by the time the deal closes, and Deepak Parekh, the chairman, is already 77 years old. In betting the house, there is at least plenty of logic.