India's HDFC Bank to Merge with HDFC, Aims for Top Global Banking Position with $172 Billion Market Cap

Courtesy: Business Standard

India's indigenous banking powerhouse, HDFC Bank, is poised to solidify its position among the world's most valuable financial institutions with the upcoming merger with Housing Development Finance Corporation (HDFC). The merger will establish the combined entity as the fourth-largest bank globally in terms of market capitalization, trailing only JPMorgan Chase, Industrial and Commercial Bank of China, and Bank of America. With an estimated market capitalization of $172 billion, the merged bank will create a formidable presence in the international banking landscape.

The merger between HDFC Bank and HDFC, hailed as the biggest transaction in India's corporate history, will result in the creation of a financial services titan. The deal, valued at approximately $40 billion, will bring together the largest domestic mortgage lender and HDFC Bank, leading to the formation of a bank worth $172 billion. The merger will impact millions of customers and shareholders across both companies, along with the group insurance and asset management businesses.

Upon the merger's completion on July 1, the new HDFC Bank entity will serve an astonishing customer base of around 120 million individuals, surpassing the population of Germany. The bank's branch network will expand to over 8,300, and its workforce will comprise more than 177,000 employees, further reinforcing its formidable presence in the industry.

HDFC Bank has surged ahead of prominent global banks like HSBC Holdings Plc and Citigroup in terms of market capitalization. Furthermore, it outshines its Indian peers, State Bank of India and ICICI Bank, both in terms of market capitalization, with the former at approximately $62 billion and the latter at around $79 billion as of June 22.

Industry experts are optimistic about HDFC Bank's growth prospects. Suresh Ganapathy, the head of financial services research for India at Macquarie Group Ltd.'s brokerage unit, highlighted the bank's promising earnings visibility and ambitious plans to double its branch network within the next four years. Ganapathy expressed confidence in HDFC Bank's ability to sustain a 2% return on assets and achieve strong loan growth, leading to a potential re-rating of the bank's stock.

The merger presents HDFC Bank with an opportunity to further expand its deposit base by tapping into the existing customer pool of HDFC. Currently, 70% of HDFC's customers do not hold accounts with HDFC Bank. Encouraging these customers to open savings accounts will strengthen the bank's relationship with them. Additionally, the merged entity will be able to offer in-house home loan products to its clients, further enhancing customer engagement.

Investor confidence in HDFC Bank remains high, with JPMorgan counted among its largest investors. HDFC Bank's contingent convertible bonds, considered the riskiest form of debt, have outperformed global peers. This year, HDFC Bank's perpetual dollar notes have delivered a notable return of 3.1%, while Bloomberg's index of global banks' coco bonds experienced a loss of 3.5%.

Technical analysts have set optimistic targets for HDFC Bank's stock, projecting potential gains up to Rs 2,000. Similarly, HDFC's stock is expected to reach targets as high as Rs 2,950. The recent breakout of a falling wedge pattern suggests a reversal from the previous downward trend, further strengthening HDFC Bank's positive outlook.

After experiencing uncertainties regarding the merger timeline, HDFC and HDFC Bank stocks have regained the attention of investors. The management has expressed commitment to ensuring the merger's effective implementation on July 1.

The merger between HDFC Bank and HDFC is set to elevate an indigenous Indian company to the upper echelons of the global banking landscape. The merger's completion will mark a significant milestone, positioning HDFC Bank among the world's most valuable banks and enabling it to compete with its counterparts from the United States and China.

Source: The Economic Times