Banking Central | What does a bigger HDFC Bank mean for its closest rival?

The merger will see HDFC Bank’s assets rise to Rs 17.86 trillion, inching closer to SBI’s Rs 26.64 trillion. In another few years, HDFC Bank can emerge as a serious contender to SBI in India-focused larger loan deals, in the country and elsewhere.

SBI’s dominance is about to be challenged.

Since 1955, no bank has come closer to the state-owned lender’s massive asset size. Formerly Imperial Bank of India, which owns a fifth of the market share in assets and a quarter in loans and deposits, is the rate-trendsetter in the Rs 120-trillion Indian credit market.

But this will change after HDFC Bank’s merger with the parent.

The deal also gives HDFC Bank something it didn’t have—home loans. It has thrived on consumer loans but lacked strength in the juicy mortgage market. Its home loan book is minuscule compared with its book size.

Only 2 percent of HDFC Bank’s customers source home loans through the lender and about 70 percent of the parent’s customers do not bank with HDFC Bank. But, the merger with HDFC—the giant in the mortgage business—will address this glaring gap.

Also read: HDFC Bank receives RBI nod for merger with HDFC

Now for some hard work 

Going big on the elusive mortgage business reignites HDFC Bank’s ambition to be the market leader but it won’t be a walk in the park. Finding the synergy with the parent’s work culture—an emotional connect with clients—is the key.

To grow big, HDFC Bank needs to catch up on the liability side. It needs to add at least Rs 5.5 trillion deposits in FY24-25 to replace HDFC’s high-cost borrowings, Emkay Global’s analysts have said.

That means tough work for branches and some rate tinkering.

Also read: HDFC Bank-HDFC merger: All you need to know about the impact on customers

To dethrone SBI and lure bigger international clients, HDFC Bank will need to go big on a safe, mortgage book and let go of risky corporate and unsecured loans.

It will also need a better tech team and alert risk managers to avoid past run-ins with a watchful central bank.

For the regulator, too, bigger banks mean bigger challenges. HDFC Bank is a systemically important or a “too-big-to-fail” bank in India. The combined entity will warrant closer scrutiny by the regulator.

(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.