Mumbai: Is this the right time for Housing Development Finance Corp. Ltd and HDFC Bank Ltd to merge?
After HDFC chairman Deepak Parekh hinted at the possibility of a merger between India’s oldest mortgage lender and the highly profitable private bank, two analysts from CLSA Asia-Pacific Markets have said in a report released on Monday that it makes sense for the two companies to come together.
The report, titled The Right Time for Merger? by Aashish Agarwal and Rahul Jain goes on to say that if the two companies were to go ahead and merge, the likely swap ratio would be 1.8 shares of the bank for every share of the mortgage firm.
“(The) merger of HDFC with HDFC Bank will propel the merged entity to the top of domestic banking league tables. With over Rs3 trillion ($65 billion) in assets in financial year 2009, it will be the third largest domestic bank and (will have) the largest market cap bank in India,” the analysts wrote.
The provocation for the report, which also recommends investors “buy” shares of HDFC, was Parekh’s response hinting at a merger during a rapid-fire question and answer session at an event organized by industry body Indian Merchants Chamber (IMC) in early November.
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Agarwal declined to comment and said he is not authorized to speak to the media.
Keki M. Mistry, vice-chairman and managing director of HDFC, said, “One should not read too much into it (Parekh’s comment). There is nothing on the cards. It was just a rapid-fire question-answer session.”
In response to a question during the IMC session on whether he thought a merger of the two firms was possible, Parekh had simply said: “It is possible.”
It is evident from the CLSA report that its analysts believe a merger could be in the offing.
On Wednesday, shares of HDFC gained 4.92% (or Rs66.40) to close at Rs1,416.60 each, and those of HDFC Bank, 8.63% or Rs72.10 to Rs907.20 each. The Bombay Stock Exchange’s benchmark stock index Sensex rose 331 points or 3.81% to close at 9,026.
The speculation of a possible merger of the two companies has been gaining currency with banking regulators around the world encouraging non-banking financial companies to become banks because their business model is seriously challenged in a liquidity crunch. Unlike commercial banks, non-banking financial companies do not have access to low cost funds from savings and current accounts.
A senior executive affiliated to the HDFC group said a merger “makes more sense than ever before”. He spoke to Mint on condition of anonymity because he is not part of the core team that decides on such issues.
“It won’t just be a balance sheet merger, but will lead to many synergies for the group. For the mortgage financing business, it would help improve the funding costs leveraging HDFC’s strong deposit franchise. For the bank, it would provide...much needed capital and a high RoE (return on equity) business which will allow the bank to grow its other businesses without a need for further dilution (in equity to raise money),” the CLSA analysts wrote.
“Allowing the bank to leverage the excess capital and higher RoE of the mortgage business, and allowing the mortgage business access to low cost retail deposit, which may further boost its profitability.”
While the ongoing global credit crisis has hurt non-banking financial firms more than it has banks, Mistry said that the HDFC model is still relevant. “India is different. There is a shortage of housing in India coupled with a low penetration and there is a role for housing finance companies in India.”
An executive at an institutional investor with at least 1% stake in HDFC said a merger would make sense only for one reason: “HDFC has to fund HDFC Bank’s growth by making periodic investments in the bank. It would make sense to have a single balance sheet.”
The executive, who asked not to be identified citing issues related to compliance, admitted that the merger would not make much sense for HDFC, “the most profitable non-banking finance company in the world”.
If the two firms decide to merge, it will be the second merger for the bank in successive years. Last year, Centurion Bank of Punjab was merged with HDFC Bank.