Merger of HDFC entities to push banks towards mergers and acquisitions: Fitch

The proposed merger of HDFC Bank and HDFC Ltd and the recently announced acquisition of Citibank India’s consumer business by Axis Bank could encourage banks to turn to merger and acquisition (M&A), Fitch Ratings said in a report. It added banks could target large non-banking financial institutions (NBFIs) due to their higher-margin products, large pools of priority-sector customers and loans, and potential cross-selling opportunities.

“The proposed merger could redefine the competitive landscape for banks and increase the prominence of M&A among banks seeking to close the market-share gap with the merged HDFC Bank. It could also influence the evolution of the NBFI sector, particularly for large entities that have nurtured banking ambitions amid tightening sector regulations,” Fitch said in a statement.

However, the regulatory attitude towards such acquisitions will be an important factor in their success. The merger between two large entities may have long-term implications for the country’s banking and NBFI sectors. The rating agency’s commentary comes days after the merger of two large entities of the sector.

The combined HDFC entity will have an asset base of $340 billion, nearly half the size of State Bank of India and double its nearest competitor, ICICI Bank. It will account for nearly 14% of system loans and 9% of system deposits, — a roughly 300 basis points jump in loan market share and about 100 basis points for deposits from the standalone HDFC Bank.

According to Fitch, both entities stand to gain from the deal. HDFC Bank will gain about 500 new branches, improve its operating efficiency as HDFC Ltd’s cost to income ratio is 10% versus the bank’s 36%, and diversify its loan book as the bulk of the loans will be mortgages. HDFC will benefit from greater liquidity and a gradual shift to lower-cost deposits to support a more competitive offering in the large-ticket housing space.  Last month, Axis Bank announced the acquisition of CitiBank’s India retail business, including banking, credit cards, home loans and wealth management at $1.6 billion.

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