Merger with HDFC to moderately hurt HDFC Bank’s profitability: Moody’s

Ratings agency Moody's has affirmed all the all the ratings of HDFC Bank Ltd. following the announcement of the merger with HDFC Ltd with a stable outlook. However, Moody's said the deal will moderately hurt the lender's profitability.

"The rating affirmation with a stable outlook takes account of Moody's expectation that the financial fundamentals of HDFC Bank will remain stable and robust after considering the financial impact of the proposed acquisition of HDFC Ltd by the bank," Moody's said.

Moody's further said the two entities' solid commercial and retail banking franchises reflected in their status as the largest private-sector bank and largest non-bank finance company in India by assets will support their funding and liquidity.

On 4 April, HDFC Bank announced a merger with its parent HDFC in an all-stock transaction. The boards of both entities have approved the merger and expect the transaction to close by end-2023, upon completion of closing conditions including regulatory and shareholder approvals.

The rating affirmation considers the leading market position and strong franchises of HDFC Bank and HDFC, their stable operating performance through credit cycles, including asset quality, capitalization, and profitability which is supported by strong access to retail and wholesale funding, Moody's said.

"The stable rating outlook reflects Moody's expectation that the HDFC Bank will continue to prudently manage its solvency and liquidity even after the transaction is complete," it said.

Moody's sees the merger to significantly enhance HDFC Bank's product portfolio with a higher percentage of secured and long duration mortgage loans.

HDFC is the largest mortgage lender in India with a long-operating track record of over 40 years.

"The merger will also improve the bank's ability to cross-sell retail banking products to the customers of HDFC. The increased scale and comprehensive product offering will help the combined group's drive revenue opportunities and support operating and underwriting efficiencies."

"The transaction will moderately hurt HDFC Bank's profitability in the next 2-3 years driven by higher funding costs to meet the regulatory liquidity norms, including cash reserve ratio, statutory liquidity ratio as well as costs associated with compliance with the priority sector lending norms," it added.