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Fitch Ratings said on Tuesday that the recently announced merger between HDFC Bank and HDFC - India's second-largest lender and largest housing finance company respectively - may have long-term implications for the country’s banking and non-bank financial institution (NBFI) sectors.

The credit rating agency's commentary comes days after the financial services majors announced the all-stock amalgamation, wherein shareholders will get 42 shares in HDFC Bank for every 25 shares held in HDFC.

HDFC currently holds around 21 percent of HDFC Bank. The proposed merger, subject to shareholder and regulatory approvals, is likely to complete in 12-18 months and set to create one of the largest lenders in the world.

Fitch said the HDFC-HDFC Bank combination could redefine the competitive landscape for banks, and increase the prominence of M&A among banks seeking to close the market share gap with the merged entity.

It could also influence the evolution of the NBFI sector, particularly for large entities that have nurtured banking ambitions amid tightening sector regulations, the credit ratings agency added. "Three rounds of state bank mergers since 2017 have led to some consolidation but with limited impact on pricing power," it added.

Fitch expects both entities to stand to gain from the deal. "HDFC Bank will gain about 500 new branches, improve its operating efficiency as HDFC Limited's cost/income ratio is 10 percent versus the bank's 36 percent, and diversify its loan book, as the bulk of the loans will be mortgaged. HDFC Limited will benefit from greater liquidity and a gradual shift to lower-cost deposits to support a more competitive offering in the large-ticket housing space. It will also be able to expand in affordable-housing financing, underpinned by the combined distribution network," it said.

According to Fitch, Indian banks intermediate roughly 60 percent of system credit but face stiff competition as the market is fragmented and products are fairly homogenous.

The combined HDFC entity will have an asset base of $340 billion, nearly half the size of the country's largest bank, SBI, and double that of its nearest competitor, ICICI Bank.

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&As, according to Fitch.

Last month, Citigroup announced selling its India retail business, including banking, credit cards, home loans and wealth management, to private lender Axis Bank for $1.6 billion in cash.

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Fitch has a 'BBB-' rating with a negative outlook on SBI, and 'BB+' with a negative outlook each on ICICI Bank and Axis Bank.

Fitch is of the view that large NBFIs could be acquisition targets given their higher-margin products, large pools of priority-sector customers and loans, and potential cross-selling opportunities. However, the regulatory attitude towards such acquisitions will be an important factor in their success, it added.

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First Published:Apr 12, 2022 1:08 PM IST