HDFC-HDFC Bank merger to be EPS-accretive from day 1: Keki Mistry

Keki Mistry, Vice Chairman and CEO, HDFC (File Image)

Shares of Housing Development Finance Corporation (HDFC), India’s largest mortgage lender, and HDFC Bank have slumped close to 15 percent each after the initial euphoria over their merger announcement on April 4.

HDFC vice-chairman and managing director Keki Mistry spoke with CNBC-TV18 on what the merger means for customers, about concerns emerging over post-merger synergies, particularly in the distribution of housing loans, and also on cross-selling opportunities for HDFC Bank.

The recent selling of shares by investors is due to a lack of communication between management and investors. The deal will be EPS  (earnings per share)- accretive from day 1, Mistry said.

Edited excerpts:

The whole discussion around the proposed merger has been from the shareholders' point of view. What would be the impact of the merger on HDFC and HDFC Bank, fund raising?

Now, we will not be borrowing money as a housing finance company. We would be getting money through savings, current accounts and deposits like other banks. So, the cost of funding should come down.

Secondly, we will have the full HDFC Bank platform to distribute housing loans. Today, as you look at it, HDFC Bank does not source housing loans. Ones that do the sourcing of loans for us take about 27% of our business. In half of the places, HDFC does not have a presence in a nearby location. Ideally, we would like to have our offices in a nearby location to meet the customer. In case there is a delay in making payments, we can also contact the customer. So, when we become one entity, the full array of banking branches will be available to us for distribution (of housing loans). The shareholders of the bank will have our 40 years of experience in the mortgage business, which is time-tested and which is reflected in the fact that despite showing growth year after year, our asset quality in retail loans is impeccable. right from the time of the total money losses when we write off individual retail loans. It is less than 2 bps (basis points) of our total business bps. This is cumulative. In a period of 40 years.

Will the merger lead to potentially selling non-housing loans to your HDFC customers? 

In terms of our ability to cross-sell, if we look at our customer base, 70% of our customers do not bank with HDFC Bank. These customers have a good association with HDFC because we help them buy a house, which is like the single largest possession. If we go back to these customers and say we are now one entity and ask them to shift their banking needs to HDFC Bank, we will get assistance on it.

Why is there selling pressure on your stocks? What is the feedback that you have received from your discussion with foreign shareholders?

The only reason we think there is selling is because we were not being able to communicate some of these (facts) to our investors after the Board meeting. This is one reason. Another reason is mass-scale foreign selling. Both HDFC and HDFC Bank are extremely liquid counters. Foreign investors are pulling out from emerging markets either due to higher interest rates in the US market or the Russia-Ukraine (war) impact. But the investors we talked to have not expressed any real concern over this (merger). As things get clearer with the passage of time, the stocks will move up logically.

The proposed merger will lead to higher CRR (cash reserve ratio) and SLR (statutory liquidity ratio) requirements. What concessions have you sought from the regulator in meeting the requirements?

We spoke with regulators. We sought some degree of forbearance to create this CRR, SLR and PSL (priority sector lending) over a period of three years. We are awaiting a response from the RBI (Reserve Bank of India) on the matter. We will work through it. We do not believe the regulatory process would impact the synergies that we are gaining and the synergies will more than offset any regulatory cost.

The proposed merger will see the housing book increase to one-third of the bank's book. Hence, there is a feeling that this may lead to a drag on the net interest margins while the operational costs will also increase for the bank if they open more branches. What is your view on the margin pressures that could kick in? Could the return ratios as well drag post the merger?

Why would the net interest margin reduce? HDFC today, as a mortgage company at a higher cost of funding, had a net interest margin in the last quarter at 3.5%. The bank's net interest margin is 4%. When we migrate from a largely wholesale funding structure to a more banking structure, the reduction in the cost of funds logically has to be much more than 50 bps. If it is more than 50 bps, logically it will happen, then automatically the 3.5% net interest margin we are having would be well over 4%...I don't see any drag on the net interest margin beyond an immediate couple of quarters. As far as earnings per share are concerned, it will be EPS-accretive from day one. The combined profitability of the two entities should be more than the standalone profits of HDFC Bank and HDFC as separate entities. The number of shares would come down by the virtue of the fact that the 21% shareholding of HDFC in the bank will get cancelled. So, it will be EPS-accretive from day one.

Analysts say the merger move works well for HDFC shareholders and not as well for HDFC Bank shareholders. What is your take?

HDFC Bank does not have a mortgage product. All banks today have mortgage products. Despite all other banks having mortgage products, HDFC Bank grew its individual loan book by as much as 16% in the December (quarter) period. Housing loans in the banking system are under 10% (of total lending). So, despite the fact that we don't have a banking structure, despite the fact that bank did not source housing loans from different locations, we gained market share in that period. So, imagine when all the branches of HDFC Bank start sourcing loans for us, the quantum of housing loans the bank generates will logically increase. That will be a huge benefit to the bank. Also, the fact that the housing loan book carries longer maturity enhances the overall maturity of loans for the bank and the overall duration of assets of the bank…The benefit of the lower cost structure will move on to the bank. There are enough synergies for the shareholders of HDFC Bank.​