HDFC Bank merger: RBI’s regulatory leeway positive for stock, say analysts

Last year, HDFC Bank leased over 2.5 lakh sq ft of office space in Navi Mumbai’s Airoli locality for 10 years.

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26 Aug, 2025 12:21

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The Reserve Bank of India (RBI) has allowed some regulatory relief to HDFC Bank ahead of its merger with HDFC, which is a positive for the stock, analysts said.

In a regulatory filing on April 21, HDFC Bank said the RBI has allowed calculating the Adjusted Net Bank Credit (for PSL) considering only one-third of the outstanding loans of HDFC as on the effective date of the amalgamation for the first year.

The remaining two-thirds shall be considered over the next two years equally.

Also Read: RBI allows HDFC Bank to hike stake in HDFC Life, HDFC ERGO to more than 50%

“Assuming PSL requirements would kick in only in FY25, PSL cost would reduce from Rs 20 bn to Rs 5 bn implying a core PAT upgrade of 2 percent,” brokerage Prabhudas Lilladher said in a note.

Domestic banks are required to lend 40 percent of their total disbursal to the priority sector, which includes agriculture, MSMEs, education, housing, export credit and advances to weaker sections.

“The HDFC Ltd portfolio will be allowed three years (in equal instalments), after the first year post merger, to become PSL compliant. This is against the earlier assumption of 18 months from effective date to be PSL compliant,” Dhananjay Sinha of Systematix Group told Moneycontrol.

Also read: HDFC to complete its merger with HDFC Bank by July

Investments including subsidiaries and associates of HDFC Limited have been allowed to continue as investments of HDFC Bank.

The RBI has also allowed HDFC Bank or HDFC Limited to increase the shareholding in HDFC Life and HDFC ERGO to more than 50 percent. “This certainly removes the overhang of RoE dilution due to stake sale. Also this would be a positive for HDFC Life,” the brokerage said.

Assuming the stake would increase to 51 percent, sum-of-the-parts (SOTP) impact would be Rs 3-4 on HDFC Bank’s target price of Rs 1,925, it noted.

The stock should see a positive reaction, it added.

“The RBI rule had originally mandated that the shareholding in the insurance subsidiary can be either above 50 percent or at 30 percent. With the current HDFC Ltd shareholding in HDFC Life at 48.65 percent, there was the overhang on HDFC Life shares of the possibility of selling from HDFC Ltd to become compliant with the extant regulations,” Sinha said, adding this removes a major overhang on HDFC Life shares.

No relaxation has been granted on CRR, SLR and LCR norms, which was the consensus view and HDFC Bank has also utilised the time from announcement of merger to plan for this eventuality, he added.

In a recent note, Prabhudas Lilladher assigned a buy rating on HDFC Bank with target price of Rs 1,925. Based on April 21’s closing price of Rs 1,673.80, this implies a potential upside of nearly 15 percent.

Termed as the biggest transaction in India’s corporate history, HDFC Bank on April 4 last year agreed to take over the biggest housing finance company in a deal valued at about $40 billion, creating a financial services titan. The proposed entity will have a combined asset base of around Rs 18 lakh crore.

The deal has got in-principle approval from the stock exchanges, Reserve Bank of India (RBI), SEBI, Pension Fund Regulatory and Development Authority (PFRDA), and Competition Commission of India (CCI).