Premium| Listen to this article |
HDFC Bank's $40 billion acquisition of its biggest shareholder could face regulatory hurdles due to the stake it would give the bank in the insurance sector, Reuters reported citing analysts.
HDFC Bank Ltd, India’s most valuable lender, agreed to acquire its parent and the country’s largest mortgage lender HDFC Ltd in an all-stock deal to create a $160 billion financial services behemoth that will be better positioned to tap soaring demand for home loans.
HDFC will hold 41% of HDFC Bank Ltd., a bank it helped found 28 years ago. According to the deal terms, once the deal is complete, HDFC Bank will be 100% owned by public shareholders and HDFC shareholders will get 42 shares of HDFC Bank for 25 shares held.
The merger is expected to be completed by third quarter of financial year 2023-2024. HDFC Bank’s CEO Sashidhar Jagdishan will head the merged entity.
Reuters reported earlier that the Reserve Bank of India, which acts as regulator for the financial industry, wants banks to limit ownership stakes in insurance companies.
HDFC Life and HDFC ERGO are among the leading life and general insurance companies in the private sector, and analysts say the RBI is unlikely to be comfortable with the size of the insurance operations the deal will give the bank.
HDFC Bank's management said on Monday that they have asked the regulator for clarity on complying with its rules, but analysts believe it may not be easy to come by.
"Considering there are lot of subsidiaries that need to be merged, there could be some regulatory overhang, particularly in the insurance business where the central bank is not very comfortable with banks increasing their stake," said an analyst at a domestic brokerage house.
HDFC Bank shares fell as much as nearly 3% on Tuesday, while HDFC Ltd slipped more than 2%. Both stocks had surged around 10% on Monday.
One way of folding the subsidiaries into HDFC Bank could be to create a holding company structure, but that could have a negative impact on the balance sheet in the short term, analysts said.
"If a holding company structure is enforced then the equation changes. Cost goes up as stamp duties and taxes will go up," Macquarie said in a note on Tuesday.
In the short term, return on equity (RoE), a key financial metric, will also go down as a result of meeting certain regulatory requirements, the Macquarie note said.
As a shadow bank - a finance company outside the scope of traditional banking regulation - HDFC Ltd has a higher cost of funds compared to the bank.
Post merger, the entity may therefore in the short term also see a higher cost of funds, which could affect its margin, said a portfolio manager at a retail brokerage firm.
"Due to this and other ambiguities regarding the deal and the performance, the stock may not see a big valuation re-rating immediately," he added.
If it clears the hurdles to a deal, HDFC Bank will shrink the gap in size with state-run lender and bigger rival State Bank of India, and pull further away from peers such as ICICI Bank and Axis Bank.
Download the App to get 14 days of unlimited access to Mint Premium absolutely free!