Merger of HDFC twins may drive up competition in housing finance market, say experts

The merger of India’s largest mortgage lender Housing Development Finance Corporation (HDFC) with the country’s largest private sector lender HDFC Bank is likely to create stiffer competition to existing players in the lucrative home loan market in Asia’s third largest economy, said analysts and industry players.

On April 4, the HDFC twins announced their decision to merge. HDFC will acquire 41 percent stake in HDFC Bank through the transformational merger.

Chairman Deepak Parekh called it a merger of equals. Every 25 shares held by HDFC shareholders will fetch them 42 shares of the bank. The merger is set to create an entity that will have a market cap of Rs 12.8 lakh crore and a balance sheet of Rs 17.9 lakh crore.

Analysts and housing finance companies believe that the merger will create a larger customer base, leveraging distribution across urban, semi-urban and rural geographies.

“After the merger, HDFC and HDFC Bank will be the third largest company by market cap in India, occupying a major share in the mortgage sector,” said Atul Goel, MD, Goel Ganga Group & President (Elect.), NAREDCO Pune, apex national body for the real estate and allied industries.

“Hence, a cross-sell opportunity to larger customer base will benefit the company. The mortgage offering would also be more competitive,” Goel said.

The HDFC-HDFC Bank combine will position itself as one of the largest consumer lenders in the emerging markets in Asia, according to a recent report of Morgan Stanley.

The merger will provide better funding franchise for HDFC, eventually leading to greater operational and distribution leverage, particularly given HDFC Bank's strong expansion in interior India over the past 10 years, the report said.

Karthik Srinivasan, an analyst from ICRA said the merger can potentially change the chemistry in the home loan market. “We need to see whether they will be more aggressive or less aggressive, it can be seen after a few years. Their overall portfolio of housing may shift towards bank. Market will become more competitive as HDFC in general has been competitive in their respective segments they have operated,” he said.

The bank has a presence in more than 3,000 cities and towns with about 50 percent of its branches in semi-urban and rural geographies. Through its 6,342 branches, it caters to more than 68 million customers.

While the mortgage lender has assets of Rs 6,23,420.03 crore, turnover of Rs 35,681.74 crore and a net worth of Rs 1,15,400.48 crore as on December 31, 2021, the bank's assets are pegged at Rs 19,38,285.95 crore, turnover (includes other income) at Rs 1,16,177.23 crore for nine months to December 31, 2021, and a net worth of Rs 2,23,394.00 crore, as on December 31, 2021.

Brokerage firm ICICI Direct too said the merger will facilitate larger quantum of credit into the priority sector and enhance wholesale lending. The merger will not only expand their home loan portfolio, but also open up the scope for larger ticket loans, including those for infrastructure. "There is also a chance that the customers opting for housing finance may get bifurcated," the brokerage said.

“The customers from underserved markets would no longer be forced to rely on unorganized moneylenders who charge exorbitant rates of interest. This would have a cascading effect of shattering the debt traps for such customers,” said Pramod Kathuria, Founder and CEO, Easiloan, a digital market place for home loans.

The merger is likely to bring advanced technology infrastructure, Kathuria said.

Analysts said HDFC has always incorporated advanced technology to serve customers. So, it is likely that after the merger, HDFC may even start offering greater hyper-personalised products or services to increase customer loyalty towards the brand, added Kathuria.

HDFC an HDFC Bank merger has been speculated for a while. In fact, back in 2015, HDFC Chairman Parekh had said that his company could consider a merger with HDFC Bank provided circumstances were in favour. But, the wait for the merger got longer with the parent sending the idea to backburner. Parekh had said that the merger makes sense provided there is no loss of value for shareholders.

With the parent finally merging the bank, the resultant entity will emerge as a powerhouse in the Indian banking industry.

This merger follows a proposal by RBI for large NBFCs to convert into banks, after the lending space was shaken up by the IL&FS crisis in 2018.