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5 reasons for fall in HDFC Bank share price, after merger announcement

Concerns among investors regarding CRR, PSL and SLR of the combined entity might have resulted in the price fall, say analysts

April 14, 2022 / 20:22 IST

Shares of India’s largest private sector lender, HDFC Bank, fell by around 12 per cent since the announcement of the merger of Housing Development Finance Corporation (HDFC) with the bank on April 4.

To begin with, why did HDFC merge with the bank?

According to HDFC Chairman Deepak Parekh, one of the reasons for the merger is the tightening RBI regulations of non-banks which has made raising money for NBFCs difficult. Also, the regulatory arbitrage for NBFCs compared with the banks have vanished due to the tightening of regulations by the central bank, Parekh said.

The combined entity will have a market cap of Rs 12.8 lakh crore and a balance sheet of Rs 17.87 lakh crore. The merger will enable HDFC Bank to undertake larger underwriting at scale.

HDFC Bank, on a standalone basis, had total advances of Rs 12.7 lakh crore while HDFC had Rs 5.25 lakh crore. Of its total advance book, HDFC has 77 per cent of its loans in the individual loan category. HDFC Bank, which has 28 per cent of its loan book in retail and 26 per cent in corporate, can have the advantage of HDFC’s home loan clients joining as the bank’s customers.

The merger, as guided by the parent, is expected to get completed by the second or third quarter of financial year 2024.

Why did the share price fall after the merger?   

Analysts say that the market was overly euphoric on the day of the announcement of the merger, but gradually some concerns reared up which resulted in the fall in share price.

Here are the reasons for the fall in share prices of HDFC Bank:

One, concern regarding other HDFC subsidiaries: Analysts say that although the negative impact is short-term, there is a concern among investors regarding regulations on other HDFC subsidiaries like HDFC Life and others. “The merger may weaken the subsidiary. For instance, they may have to sell some shares. So, the uncertainty remains whether HDFC will be able to scale up its subsidiaries,” added Yuvraj Choudhary, Analyst, Anand Rathi Shares and Stock Brokers.

Two, the ability to maintain SLR: According to a research report published by Systematix Institutional Equities, currently, HDFC needs to hold a Statutory Liquidity Ratio (SLR) at 13 percent of public deposits, which post-merger will rise to 18 percent of net demand and time liabilities (NDTL). “There are concerns related to the SLR requirement and the extent to which the new entity will be able to maintain the same,” said Choudhury. This too could have caused concerns among investors, said analysts.

Three, the need to hold cash reserve ratio (CRR). HDFC did not have any cash reserve ratio previously, and thus, against nil CRR balance in HDFC, the merged entity would be required to hold CRR at 4 percent of NDTL, states the Systematix Institutional Equities report. Higher mandatory reserve ratio requirements would push up the funding costs. According to analysts, this too became a point of concern among investors, which eventually led to the fall in share price.

Four, ability to build PSL: Analysts say that apart from CRR and SLR, investors are skeptical on how the new entity will be able to build the Priority Sector Lending (PSL) against the portfolio and at what cost. Moreover, the cash-to-income (C/I) ratio of HDFC Ltd is around 8 percent, while that of HDFC Bank is around 37 percent. For the combined entity, the C/I ratio is likely to decline to around 32-34 percent, says the research report. The C/I ratio is a key financial measure that shows a company’s costs as a proportion of its income. It is mostly used to measure the efficiency of the bank.

Five, too big for mutual funds: Analysts also say some investors fear the combined entity would be too big for mutual funds. “Since they may cross the threshold of 10 percent in many mutual fund schemes, chances are that these funds may be selling these stocks. While the deal will still take around 18 months to complete, investors are already exiting in anticipation,” said Vijay Singhania, Chairman, TradeSmart, a stock trading platform.

Pushpita Dey
first published: Apr 14, 2022 08:22 pm

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