HDFC Bank creates Indian lending behemoth in $40 billion deal

By Nupur Anand and Chris Thomas

MUMBAI (Reuters) -India's largest private lender HDFC Bank is buying its biggest shareholder in a $40 billion deal, the country's biggest ever, creating a financial services titan to better tap rising demand for credit.

HDFC Bank's deal with housing finance firm HDFC Ltd, which owns about 21% of the lender, will build on its 68 million customers and expand its home loan portfolio significantly while also opening up the scope for larger loans.

It will also help HDFC Bank shrink the gap with state-run lender and bigger rival State Bank of India while boosting competition in the home loan space as people step up purchases with pandemic woes receding.

The deal will be beneficial for both companies but particularly HDFC Ltd, said Asutosh Mishra, research analyst at Ashika Stock Broking.

"(HDFC Ltd) was competing with the likes of State Bank of India in a competitive home loan market, leading to pressure on margins due to disadvantages to its cost of funds," he said.

Following a 2018 crisis in the non-banking finance sector that shook India's financial system, the central bank issued guidelines in November allowing well-run large shadow lenders to be converted into banks.

HDFC Bank shares closed 10% higher on Monday, giving the firm a market value of 9.18 trillion rupees ($121.66 billion), while HDFC Ltd surged 9.3% to a valuation of 4.85 trillion rupees.

HDFC Ltd shareholders will receive 42 shares of the bank for 25 shares held, giving them ownership of 41% of HDFC Bank, which will become a full-fledged public company as the housing finance company's stake in the lender will be cancelled in the deal.

Foreign ownership will account for 65-67% of the merged company, giving foreign investors scope to buy up to a further 8%, something that had also helped lift the share price, said Siddharth Purohit, fund manager at InvesQ Investment Advisors.

"The value of HDFC Ltd is $60 billion. If you strip off the portion of their holding in us, it comes to $40 billion and that's the value of the deal," HDFC Bank CEO Sashidhar Jagdishan, who will head the combined company, told reporters at a press conference.

That would mark the largest banking sector M&A globally since April 2007, according to Refinitiv data.

BIGGER BALANCE SHEET

HDFC Bank is currently a largely retail-focused operation but the $237 billion balance sheet of the combined company will allow it to underwrite larger ticket loans, including those for infrastructure.

The merger, which is expected to complete in the second or third quarter of the financial year starting in April 2023, would expand HDFC Bank's loan book by 40% and the combined company's market value will rise to about $160 billion at current prices, Jefferies said in a note.

HDFC Ltd Chairman Deepak Parekh said HDFC Bank has written to the central bank asking for additional time to meet certain regulatory requirements such as revised Cash Reserve Ratio and Statutory Liquidity Ratio norms following the merger.

The lender has also sought clarity on whether certain subsidiaries would have to be divested where there is an overlap in the businesses of the two companies.

J.P. Morgan, Goldman Sachs and Citi were among financial advisers to HDFC Bank for the deal, while Credit Suisse, Kotak Securities and Jefferies were among advisers to HDFC Ltd.

($1 = 75.5120 Indian rupees)

(Reporting by Chris Thomas in Bengaluru and Nupur Anand in Mumbai; Additional reporting by Gaurav Dogra in Bengaluru; Editing by Arun Koyyur, Muralikumar Anantharaman, Kirsten Donovan)