India's indigenous HDFC to seal place in top echelons of most valued banking space

In a remarkable feat, an indigenous Indian company will ascend to the upper echelons of the global banking landscape, as the tie up of HDFC Bank and Housing Development Finance Corporation will seal the merged entity’s place among the world’s most valuable banks and large enough to challenge peers from US and China.

The merger between HDFC Bank and HDFC will give birth to a financial powerhouse that will claim the fourth spot in equity market capitalisation, trailing only JPMorgan Chase, Industrial and Commercial Bank of China and Bank of America, according to Bloomberg’s compiled data.

An Impressive Presence
Termed as the biggest transaction in India’s corporate history, HDFC Bank on April 4 last year agreed to take over the biggest domestic mortgage lender in a deal valued at about $40 billion, creating a financial services titan. The merger is unprecedented in India, creating a bank worth $172 billion and impacting over tens of millions of customers and shareholders across the two companies apart from group insurance and asset management businesses.

The proposed entity will have a combined asset base of around Rs 18 lakh crore.

With the merger set to take effect on July 1, the new HDFC Bank entity will serve a staggering customer base of around 120 million individuals, surpassing the population of Germany itself. Moreover, it will expand its branch network to over 8,300 and employ over 177,000 people, further solidifying its formidable presence.

Market Capitalisation
HDFC surged ahead of prominent banks such as HSBC Holdings Plc and Citigroup. Furthermore, it outshines its Indian peers, State Bank of India and ICICI Bank, both in terms of market capitalisation, with the former at about $62 billion and the latter at approximately $79 billion as of June 22.

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Suresh Ganapathy, the head of financial services research for India at Macquarie Group Ltd.’s brokerage unit, said during a Bloomberg TV interview, “Worldwide there are very few banks, which can at this scale and size, still aspire to double over a period of four years.” He said the bank is likely to grow at 18% to 20%, it has promising earnings visibility and ambitious plans to double its branch network within the next four years. “HDFC Bank will remain a pretty formidable institution,” he concluded.

Deposit Growth
HDFC Bank has consistently outperformed its peers in attracting deposits, and the merger presents another opportunity to expand its deposit base by tapping into the existing customer pool of the mortgage lender. Remarkably, 70% of these customers currently do not hold accounts with the bank. Arvind Kapil, the retail head at HDFC Bank, recently shared his plans to encourage these customers to open savings accounts, thereby strengthening the bank’s relationship with them.

Additionally, the merged entity will be able to offer in-house home loan products to its clients, as only 2% of them currently possess mortgage products from HDFC Ltd., as revealed in a presentation when the merger was announced. This expansion of product offerings is seen as a means to enhance the customer’s relationship with the bank, as highlighted by Sashi Jagdishan, the bank’s chief executive, during the announcement of the merger.

Investors’ Favourite
Enjoying high levels of investor confidence, HDFC Bank, with JPMorgan counted among its largest investors, has made significant strides. Its contingent convertible bonds, regarded as the riskiest form of debt, have outperformed global peers. So far this year, HDFC Bank’s perpetual dollar notes have delivered a noteworthy return of 3.1%, while Bloomberg’s index of global banks’ coco bonds experienced a loss of 3.5%.

Stock Performance
HDFC Bank shares have lagged the performance of NIFTY Bank index over the past year. Analysts believe the stock’s future performance will depend on the growth of the loan book, projected at 18% to 20%, and a 2% return on assets.

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“Management is confident of sustaining 2% return on assets and possibly beyond that level even post-merger and also deliver strong loan growth. If they can walk the talk, the stock will re-rate,” Ganapathy said in a note.

After facing uncertainties related to the timeline of the mega-merger, HDFC and HDFC Bank stocks are back on investors’ radar, with the management expressing their commitment to ensuring the deal becomes effective on July 1.

Technical analysts have set targets going up to Rs 2,000 for HDFC Bank and Rs 2,950 for HDFC.

As per tentative deadlines shared by HDFC’s top brass, the merger will come into effect on July 1, following separate board meetings of HDFC twins on June 30. The record date will be announced later, and HDFC is expected to be delisted from stock exchanges in mid-July.

HDFC Bank’s stock is currently trading in a 3-year ascending channel pattern and has gained strength from the lower band of the channel support, indicating a strong upward potential. It recently broke out of a falling wedge pattern, suggesting a reversal from a downward trend.