Merger could be a drag on HDFC Bank’s P&L, says Macquarie

Global financial major Macquarie believes that the merger of HDFC with HDFC Bank is good for the housing finance major but could be a drag on the private sector lender due to the higher regulatory provisioning and requirements that would come with the merger.

“While the merger will increase the bank’s product portfolio and ability to cross-sell, we think there will also be a drag on its P&L (profit & loss) due to PSL (priority sector lending) requirements and higher SLR/CRR (statutory liquidity ratio/cash reserve ratio) requirements,” stated the Macquarie report.

According to Macquarie, “HDFC Bank will have an excess SLR/CRR asset requirement of (approximately) Rs 700-800 billion and will also need an incremental (approximately) Rs 900 billion agriculture portfolio (based on 18 per cent of borrowings) to meet PSL norms. These low-yielding portfolios could be a drag on the merged entity’s P&L”.

Incidentally, it highlighted the ICICI merger of 2002 – ICICI merged with ICICI Bank – wherein the CASA (Current Account Savings Account) for ICICI - as a per centage total funding - dropped from 26 per cent in FY01 to 9 per cent in FY03 and recovered to the 30 per cent level only by FY10.

“Refinancing HDFC Ltd’s funding with low-cost deposits will be key for success of the merger, in our view. HDFC Bank’s effective CASA could go down to (approx) 35 per cent from (approx) 47 per cent post-merger,” stated the report.

For the global major, the Indian central bank’s approval for the merger will also be a key factor to look forward to as the merged entity will be owning substantial stake in subsidiaries in the insurance and mutual fund businesses.

This assumes significance as recently the Reserve Bank of India (RBI) did not allow Axis Bank to directly own more than 10 per cent in Max Life and ICICI Bank was also asked to pare its shareholding in ICICI Lombard to less than 30 per cent.

“RBI’s approval will also be key monitorable, as the bank will end up owning 48 per cent in the life, (around) 50 per cent in the general insurance and 69 per cent in the AMC entities of the group,” highlighted the Macquarie report.

Interestingly, Macquarie believes that the merger will solve the succession problem at HDFC “to a great extent”.

The global major has maintained a ‘buy’ rating on HDFC Bank, which is also its top pick among banks, with a 12-month target price of Rs 2,005.

During afternoon trading session on Tuesday, HDFC Bank was the top loser in the Sensex pack, shedding over 2 per cent while HDFC was down 1.27 per cent.