The mega merger between Housing Development Finance Corp (HDFC) and HDFC Bank will serve as a test case for all significant mergers, going ahead. However, the triple challenge of complying with regulatory requirements, deposit mobilisation and technology integration will test India’s largest private bank’s management bandwidth to the hilt, say industry experts.
HDFC Bank will face challenges in mobilising a huge pool of deposits to meet regulatory requirements, including those on cash reserve ratio (CRR), statutory liquidity ratio (SLR) and priority sector loans (PSL), they add.
To be sure, HDFC Chairman Deepak Parekh on April 4 said that HDFC Bank has sought some leeway from the Reserve Bank of India (RBI) on implementation of some regulatory requirements following the merger with HDFC.
“The bank has requested the Reserve Bank for a phased-in approach in respect of SLR and CRR, priority sector lending and grandfathering of certain assets and liabilities and in respect of some of its subsidiaries. These requests are under consideration by the RBI in terms of their letter to the bank dated April 1, 2022,” Parekh said.
Regulatory challenges
Industry experts feel the chances of the regulator granting any leeway, especially on the PSL front, are less likely judging by precedents.“The real concern in this merger is about mobilising a huge pool of deposits to meet regulatory requirements, including CRR/SLR/PSL, and replacing HDFC Ltd's high-cost borrowings to the tune of Rs 4.2 trillion, excluding housing bonds,” says Anand Dama, head of BFSI at Emkay Global Financial Services.
“Any regulatory leeway on meeting PSL norms looks difficult as other banks, too, have been denied such relief in the recent past. That said, some leeway on sub-targets could be expected,” he adds.
Further, the central bank may also have concerns around the non-lending business of HDFC being housed in the bank under the proposed merger structure.
As on December 31, HDFC held a 47.8 percent stake in HDFC Life Insurance Co, 50 percent in HDFC Ergo General Insurance and 52.6 percent in HDFC Asset Management.
“This may test the RBI’s longstanding stance to ringfence the bank from any fallout in other businesses and avoid any regulatory overlap,” says Dama.
Technology infrastructure
It is safe to say that HDFC Bank’s servers not functioning in an optimal manner and resulting in disruption of online banking services is one of the biggest issues for the bank’s top brass to tackle.The private sector major, with a customer base of 68 million, was even temporarily banned from issuing new digital services in December 2020 till it appointed an external firm to audit its tech infrastructure.
The ban was lifted just over a month back, on March 11, and it remains to be seen how the bank will handle the added burden of tech integration with HDFC, which itself has a customer base of 4.4 million borrowers and depositors.
“While the combined entity benefits from several efficiencies, the most obvious being the reduced cost of funds or higher RoE, the tech integrations will be a nightmare, and hence, a very slow and selective process. Organisations of this scale take 5-7 years for complete integration, if not more,” says Amit Das, Co-founder and Chief Executive Officer, Think360.ai.
Das adds that despite the well reported problems of tech outages at HDFC Bank, it should be ready to handle the potential cross-sell and up-sell opportunities that will come along.
“Teams have been working on fixing the issues and upgrading the systems. However, we are still talking about real evidence emerging 3-4 quarters down the line,” he says.
In an exclusive interview with Moneycontrol on March 16, Parag Rao, HDFC Bank’s group head of payments, consumer finance and digital banking, had said the bank has used the interim period to relook at fault areas and revamp strategy.
“The key thing that emerged out of this embargo (the RBI ban on offering new digital services) and the comments made by the RBI was that we have no problem with your ambition to grow and you should grow because that is the whole job of financial services players, to spread out financial services to India, but please make sure that you build your systems and invest adequately in your infrastructure to sustain that growth. That is the crux,” Rao had said.
Near-term impact
Analysts say that HDFC Bank is also likely to see a rise in operating expenses in FY23 due to its fast branch expansion plans. CNBC-TV18 had on April 19 reported that HDFC Bank had opened 563 new branches between January and March 2022. And, going forward, for every 100 branches, it wants to add another 10 to 15 every year.The intent of the bank is to have a branch within 1-2 kms of its customers, from the current level of 5-6 kms, says the report.
Experts say this will likely lead to a rise in operating expenditure for the bank as each branch typically costs up to Rs 6 crore to operate.
“Higher branch expansion costs leading to elevated opex along with excess liquidity on the bank's balance sheet in the run-up to the merger would hurt its core margins and thus profitability,” says Dama.
Apart from the impact on the bottomline, in the near term, both HDFC and HDFC Bank’s shares have come under pressure due to profit booking and as both foreign and domestic institutional investors review their holdings to comply with internal exposure policies.
“The recent selloff in HDFC Bank and HDFC Ltd was primarily due to profit booking. The merger announcement resulted in a surge in the valuation of both entities. Since both counters are fairly liquid it is easier to monetise large quantities of holding in these stocks than selling smaller companies,” says Sachin Mehta, Director of investment banking at Anand Rathi Advisors.
Lastly, from a legal perspective there will not be many issues for the merger as the two entities belong to the same group, says Ameet B. Naik, Founding & Managing Partner at Naik, Naik & Co.
If any petitions are filed against the merger with substantive grounds then the National Company Law Tribunal (NCLT) will likely hear those petitions, which, in turn, will inevitably delay the proceedings.
However, so long as statutory requirements, including obtaining consents, are met, and the majority votes in favour of the scheme, the NCLT is unlikely to interfere with the merger, says Naik.
