The proposed merger of HDFC Bank and HDFC Ltd could redefine the competitive landscape for banks, and increase the prominence of M&A among lenders seeking to close market-share gap with the merged entity, Fitch Ratings said on Tuesday. Fitch believes that the proposed merger of the HDFC entities and the recently announced acquisition of Citibank India's consumer business by Axis Bank could encourage banks to turn to M&A (merger and acquisition).

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"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. It could also influence the evolution of the NBFI sector, particularly for large entities that have nurtured banking ambitions amid tightening sector regulations," Fitch said in a statement. Large non-bank financial institution (NBFI) could be acquisition targets, given their higher-margin products, large pools of priority-sector customers and loans, and potential cross-selling opportunities.

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"However, the regulatory attitude towards such acquisitions will be an important factor in their success," the agency said. Last week, India's most valuable lender HDFC Bank agreed to take over the country's largest mortgage lender in a USD 40 billion deal, creating a financial services titan in the largest transaction in the nation's corporate history.

The proposed entity will have a combined asset base of around Rs 18 lakh crore. The merger is expected to be complete by the second or third quarter of FY24, subject to regulatory approvals. Fitch said the combined HDFC entity will have an asset base of USD 340 billion, nearly half the size of the largest bank, State Bank of India, and double its nearest competitor, ICICI Bank.

The all-stock merger will take between 12-18 months to complete, subject to regulatory approvals.