How HDFC, HDFC Bank merger will shake up India's loan market

 

HDFC-HDFC Bank merger: 'HDFC's exit will initially hurt overall sales volume next year,' said Jayan Shah, founder of Mavuka Capital Advisors Pvt, a fintech investment banking firm

India's biggest ever merger will remove one of its top issuers from the rupee bond market, an absence that could put a burden on loan sales and arrangement fees for banks.

The consolidation of Housing Development Finance Corp and the entity HDFC Bank Ltd will create a financial services conglomerate worth more than $200 billion, and the parent will be able to grow the bank's deposits instead of piling on more debt. It is not all bad for India's bond world as the gap created by the shadow lender could allow new borrowers to sell the notes, helping India deepen its debt market.

The shadow lender is India's biggest bond seller in 2022, with issuance of 7.7% of the country's total issuance volume this year, higher than the average of about 6% over the past 10 years, Bloomberg-compiled data show. The merged entity will be a bank and is still likely to offer notes to boost its capital buffers and fund infrastructure projects.

"HDFC's exit will initially hurt overall sales volumes next year," said Jayen Shah, founder of Mavuka Capital Advisors Pvt, a fintech investment banking firm. Yields will stabilize next year, which may gradually fill the void."

The merger, expected to close in the second quarter of 2023, will give HDFC access to 16.7 trillion rupees ($202 billion) in funds, including so-called low-cost current and savings account deposits and bank fixed deposits. This will allow it to continue expanding its assets, which stood at 6.9 trillion rupees at the end of September.

The exit of a debt issuer of that size hurts the fee income of bankers who have arranged HDFC's various offerings. Over the past few years, Axis Bank Ltd and ICICI Bank Ltd have overseen most of those sales, Bloomberg-compiled data shows.

However, for HDFC's competitors, the firm's exit could be a positive in terms of fundraising. "HDFC's exit from the bond market will benefit its peers as it will give them access to a larger pool of credit," said Shah of Mavuka.