HDFC-HDFC Bank merger to bring foreign inflows of up to $3 billion

• India’s largest housing finance company HDFC is all set to merge into HDFC Bank, the country’s largest private sector lender.
• According to analysts, this could result in inflows to the tune of up to $3 billion if done in time for the MSCI India Standard Index’ quarterly review scheduled for May this year.
• While HDFC Bank’s March quarter earnings were in line with analyst expectations, the stock’s next major trigger is the merger.

India’s largest private-sector lender HDFC Bank and largest housing finance company HDFC are all set to merge by July this year – and that is likely to result in foreign portfolio investors (FPI) inflows of up to $3 billion.

According to the shareholding data at the end of the March 2023 quarter, the foreign shareholding in HDFC and HDFC Bank on a merged basis stood at 60.9%, slightly down from the 61.1% holding at the end of the December quarter.

That leaves room for foreign shareholders at 17.71%, comfortably above the 15% room required for the inclusion of a stock in the MSCI India Standard Index.

"It is critical for the additional investible foreign room to be above 15% till the merger gets completed,” said a report by Nuvama Institutional Equities.

If the room remains above the 15% threshold, then the brokerage says it could lead to foreign investment flows of up to $3 billion.

“If the merger closes before the MSCI May 2023 Quarterly Comprehensive Index Review, inflows in HDFC Bank can increase to $3 billion,” the brokerage said.

Merger to be completed by July, says HDFC Bank

In its March quarter earnings, HDFC Bank’s management noted that the merger is likely to be completed by July 2023, post all the necessary regulatory approvals and shareholder confirmation.

The HDFC-HDFC Bank merger has received in-principle approvals from the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), the Competition Commission of India (CCI) as well as the National Company Law Tribunal (NCLT), among others.

“From a timing point of view, that June or July, possibly July, is where we think the time frame is,” said HDFC Bank’s chief financial officer Srinivasan Vaidyanathan in a post-earnings call with analysts.

The analysts at Nuvama said the lender could try and expedite the merger by May, two months earlier than the expected timeline and just in time for the MSCI’s quarterly index review.

HDFC Bank’s Q4 earnings in line with expectations: All eyes on the merger

HDFC Bank’s March quarter earnings were in line with analyst expectations, but the next catalyst for India’s largest private sector lender is the merger. The stock has witnessed see-saw movement in 2023 so far, gaining 2.5% till date compared with a 2.2% decline in Nifty Bank Index.

“HDFC Bank expects the merger to complete by July 2023, once RBI approval is in place which we believe will be critical from the point of view of the merger’s structure,” said a report by Emkay Global, adding that the merger could drive up operating expenses, resulting in a 1% downward revision in the lender’s FY24 earnings estimate.

Analysts at Kotak Institutional Equities say that the merger is a near-term headwind, adding, “Investors are discussing the investment argument to own ahead of the merger for market-related concerns,” the brokerage said.

The bank reported a 23.7% YoY growth in net interest income to ₹23,352 crore, while its pre-provisioning operating profit grew 14.4% YoY to ₹18,621 crore. Its net profit came in at ₹12,048 crore, growing by 19.8% YoY.

Asset quality also witnessed an improvement during the quarter – its net non-performing assets improved to 0.27% in Q4 from 0.33% in Q3.

For now, though, all eyes are on the merger and it remains to be seen if the lender expedites the process to gain from the MSCI index review.

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