Proposed Merger Of HDFC Bank, HDFC To Moderately Hurt Bank's Profitability: Moody's

The proposed merger of HDFC Bank and HDFC Ltd. will moderately hurt the lender's profitability in the next 2-3 years, driven by higher funding costs to meet the regulatory liquidity norms, global rating agency Moody's Investors Service said on Wednesday.

The rating agency, however, affirmed all the ratings of HDFC Bank, including the Baa3 long-term local and foreign current deposit ratings and Ba3(hyb) Additional Tier 1 securities rating.

The rating affirmation with a stable outlook takes account of Moody's expectation that the financial fundamentals of HDFC Bank will remain stable and robust after considering the financial impact of the proposed acquisition of HDFC by the bank, the agency said in a statement.

The two entities' solid commercial and retail banking franchises reflected in their status as the largest private-sector bank and largest non-bank finance company in India by assets will support their funding and liquidity, it said.

On April 4, 2022, HDFC Bank and HDFC announced that they had entered into a definitive agreement whereby the business of HDFC Ltd. will be merged into HDFC Bank in an all-stock transaction.

The boards of both entities have approved the merger and expect the transaction to close by the end-2023, upon completion of closing conditions, including regulatory and shareholder approvals, it said.

The proposed transaction will significantly enhance HDFC Bank's product portfolio with a higher percentage of secured and long duration mortgage loans, the agency said, adding the merger will also improve the bank's ability to cross-sell retail banking products to the customers of HDFC Ltd.

The increased scale and comprehensive product offering will help the combined group's drive revenue opportunities and support operating and underwriting efficiencies, it said.

'The transaction will moderately hurt HDFC Bank's profitability in the next 2-3 years driven by higher funding costs to meet the regulatory liquidity norms, including cash reserve ratio, statutory liquidity ratio as well as costs associated with compliance with the priority sector lending norms. Further, the share of market funding will increase in the near term,' it said.

Nevertheless, Moody's expects the bank's strong retail franchise and access to low-cost depositors will help mitigate the impact. It also expects the combined entity's asset quality and capitalisation to remain broadly stable.