HDFC merger’s domino effect: Fitch says HDFC twins deal could pave way for more banking M&A deals

The mammoth $40 billion proposed merger of HDFC Bank with Housing Development Finance Corporation may create a domino effect in the banking sector, and could pave the way for other banks to take the merger and acquisition route. “The proposed merger could redefine the competitive landscape for banks, and increase the prominence of M&A among banks seeking to close market-share gap with the merged HDFC Bank,” Fitch Ratings said in a note Tuesday.

The global rating agency also said the proposed merger of India’s second-largest bank, HDFC Bank with India’s largest housing finance company, HDFC Limited, may have long-term implications for the country’s banking and non-bank financial institution (NBFI) sectors. “The deal could influence the evolution of the NBFI sector, particularly for large entities that have nurtured banking ambitions amid tightening sector regulations,” Fitch said. Analysts have also said that the narrowing gap between arbitrage of banks and NBFCs could have been one of the prime reasons for the merger, as the merged entity seeks to improve its profitability.

India’s banking sector faces stiff competition as the market is fragmented and products are fairly homogeneous, Fitch said, adding that banks might seek some consolidation. Fitch said the merger of HDFC twins along with Axis Bank’s plan to acquire retail assets of CitiBank India could encourage other “banks to turn to M&A”. “Large NBFIs could be acquisition targets, given their higher-margin products, large pools of priority-sector customers and loans, and potential cross-selling opportunities,” it added.

The rating agency however,  noted that regulatory attitude towards such acquisitions will be an important factor in the success of these deals. The combined HDFC entity will have an asset base of $340 billion, nearly half the size of the largest bank, State Bank of India, and double its nearest competitor, ICICI Bank. Regulatory agencies such as the banking regulator RBI, markets regulator SEBI and competition regulator CCI would closely scrutinise the deal before it is approved. HDFC has thus set an 18-month timeline for the deal to pass through.

The Reserve Bank of India previously raised the idea of converting large systemically important NBFIs into banks, but this was not made policy, Fitch said. This merger could serve as a template for entities keen to explore this route, it added.

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