With effect from 1st July 2023 both HDFC Bank Ltd. and Housing Development Finance Corporation are merging, that creates a lender that ranks fourth in equity market capitalization, leaving behind only JPMorgan Chase & Co., Industrial and Commercial Bank of China Ltd. and Bank of America Corp., according to data compiled by Bloomberg and is valued at about $172 billion.
With the merger, the new HDFC Bank entity will have around 120 million customers which is greater than the population of Germany. Also it will increase its branch network to over 8,300 and boast of total headcount of more than 177,000 employees.
The following charts highlight the scale of this global banking giant and examine some of the challenges ahead for its stock price.
(1) Market Capitalization
- HDFC surges ahead of banks including HSBC Holdings Plc and Citigroup Inc.
- Also the bank leaves behind its Indian peers State Bank of India and ICICI Bank, with a market capitalizations of about $62 billion and $79 billion, respectively, as of June 2022.
- The bank expects to grow at 18% to 20%, and there is very good visibility in earnings growth, and they plan to double their branches in the next four years, and thus HDFC Bank is expected to remain a pretty formidable institution.”
(2) Deposit Growth
- HDFC Bank has consistently outperformed its peers in garnering deposits and the merger offers another opportunity to grow its deposit base by tapping the existing customers of the mortgage lender.
- Around 70% of those customers do not have accounts with the bank and the Bank plans to get them to open a savings account.
- Further, the lender will be able to offer inhouse home loan products to its clients as only 2% of them had a mortgage product from HDFC Ltd., according to a presentation when the merger was announced.
- This means, the lifetime value of a customer’s relationship with that bank just enhances when the bank starts to put a mortgage into his product offerings.
Confidence Check
- HDFC Bank, which considers JPMorgan among its largest investors as a peer in the industry, is enjoying high levels of investor confidence. Its contingent convertible bonds — the riskiest type of debt that can convert to equity if a lender runs into trouble — has outperformed its global peers.
- The continuous dollar notes of HDFC Bank has provided its investors a return of 3.1% so far this year, even at a time when Bloomberg’s index of global banks’ coco bonds lost around 3.5%.
- The aggregate index has managed to retart, some of its underperformance in recent months after the turmoil caused by a controversial wipeout of Credit Suisse Group AG’s bonds eased.
Stock Performance
- HDFC Bank shares are quoted less than the NIFTY Bank index over the past year. However, the bank’s analyst, reckons the stock’s performance will depend on the growth of the loan book at 18% to 20%, and a 2% return on assets.
- The bank’s Management is confident of sustaining 2% return on assets and possibly beyond that level even post-merger and also deliver strong loan growth.
Let us wait and see how the bank performs in the coming days…
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