Top Indian mortgage firm merger to create US$190b giant

[MUMBAI] India's biggest mortgage lender agreed to buy one of the country's most valuable banks to create an almost US$190-billion behemoth to ride a boom in home loans and consumer spending in the world's fastest-growing major economy.

Housing Development Finance Corp (HDFC), which issues mortgages to more than half the home buyers in a country of 1.4 billion people, will hold 41 per cent of HDFC Bank, a bank it helped found 28 years ago. Shares of the 2 Mumbai-based companies surged on the announcement.

The deal, which will create one of India's largest financial services entities, follows a proposal by the banking regulator for large non-banking finance companies to convert into banks to avoid a repetition of the nation's massive shadow lending crisis in 2018.

India's emergence from the pandemic and an improvement in the labour market has helped boost consumer demand and improve lenders' retail portfolios.

"We think the proposed merger may reduce HDFC Bank's exposure to unsecured loans and bolster its capital base, further supporting its sector-leading asset quality and capital position which are key credit strengths among the banking peers," said Bloomberg Intelligence analyst Rena Kwok.

"Although HDFC Bank's unsecured loan exposures weren't high, the bank had been growing its credit cards and personal loans aggressively because of higher yields to improve interest margins."

Shares in HDFC soared as much as 20 per cent after the announcement, while HDFC Bank jumped 14 per cent in Mumbai. HDFC has 6.23 trillion rupees (S$111.9 billion) in assets and a US$66 billion market capitalisation as of Monday (Apr 4). The bank has 19.38 trillion rupees in assets and a market cap of about US$120 billion.

"Fundamentally it's a right decision," said Amit Kumar Gupta, a New Delhi based fund manager with Adroit Financial Services. "Foreign institutional investors (FII) were not able to buy into HDFC Bank because of the 74 per cent limit. So this is a way to allow more FIIs (to) come into the HDFC Bank."

Once the deal is complete, HDFC Bank will be 100 per cent-owned by public shareholders and HDFC shareholders will get 42 shares of HDFC Bank for 25 shares held.

"I think it's a good thing for the Indian banking system" for a large non-banking finance firm to merge with a big bank, Duvvuri Subbarao, former governor of the Reserve Bank of India, said on Bloomberg TV on Monday. "India wants to upsize its banks to a global scale and it will be a good thing for Indian banking, especially private sector banks." BLOOMBERG