India’s HDFC Bank is set to complete its mega-merger with its parent company, Housing Development Finance Corporation (HDFC), in July, giving the country’s largest private lender a new lease on life with a market value of approximately $140 billion. The merger will create a mortgage giant in a market that is currently experiencing a shortage of credit. However, outstanding mortgages in India account for only 11% of the country’s GDP, compared to 18% for China and 52% for the United States. Still, the merger will enable HDFC Bank to be more aggressive in the market, increasing the share of mortgages in its portfolio to almost 30%, compared to its nearest competitor, State Bank of India, with only 20%.
HDFC Bank currently sells most of the home loans it originates to its parent company, but that is expected to change with the merger, enabling the bank to have homebuyers as its primary customers. Additionally, with fewer than one-third of HDFC’s borrowers currently holding an account with the lender, there is potential for cross-selling credit cards and vehicle loans. The merger will also increase the bank’s valuation, which is already high with a multiple of three times forward book value.
However, HDFC Bank is not without its issues. Although the CEO is focusing on improving technology and employee culture, the bank is still recovering from a ban imposed by regulators on sourcing new credit-card customers and launching new IT platforms after multiple outages on its internet banking channels. These concerns may be mitigated by the increased growth potential following the merger.
Foreigners currently account for 66% of HDFC Bank’s ownership, making it a favored way to invest in India’s growth story. Regulations currently cap overseas shareholdings at 74%, suggesting there is still room for foreign investors to buy into the bank’s larger entity.
The merger is expected to be completed by July, according to HDFC Bank’s CFO Srinivasan Vaidyanathan. The bank’s parent company, Housing Development Finance Corporation, has already agreed to sell a 90% stake in its education-loan unit, Credila, for 90.6 billion rupees ($1.1 billion) to a consortium of BPEA EQT and ChrysCapital. The Reserve Bank of India had required the mortgage financier to reduce its stake in Credila to 10% within two years of the effective date of the merger.
Overall, the merger of HDFC Bank and its parent company, Housing Development Finance Corporation, presents an exciting opportunity for investors to capitalize on the growing demand for mortgages in India’s market. While there are some challenges that the bank will need to overcome, the increased growth potential following the merger will undoubtedly benefit the bank and its investors.
