According to analysts, India’s largest private lender HDFC Bank’s $40 billion acquisition of its largest shareholder could encounter regulatory challenges due to the bank’s interest in the insurance business.
Last year, sources told Reuters that the Reserve Bank of India, the country’s financial regulator, wants banks to limit their ownership shares in insurance companies.
The acquisition of HDFC Ltd by HDFC Bank, announced on Monday, will result in a $237 billion combined balance sheet, which will comprise the target’s insurance and other financial businesses.
The RBI is unlikely to be satisfied with the size of the insurance operations that the deal will give the bank, according to analysts. HDFC Life and HDFC ERGO are among the leading life and general insurance companies in the private sector, and analysts say the RBI is unlikely to be satisfied with the size of the insurance operations that the deal will give the bank.
The management of HDFC Bank announced on Monday that they had sought the regulator for clarification on how to comply with its standards, but analysts believe this will be difficult to come by.
“Given the large number of subsidiaries that need to be combined, there could be some regulatory overhang,” said an analyst at a domestic trading house. “This is especially true in the insurance market, where the central bank is wary of banks increasing their participation.”
On Tuesday, HDFC Bank did not immediately respond to a request for comment from Reuters. A request for comment was similarly ignored by the RBI.
The creation of a holding company structure could be one method to integrate the subsidiaries into HDFC Bank, but analysts warn that this could have a short-term negative impact on the balance sheet.
“The equation alters if a holding company structure is imposed. As stamp duties and taxes rise, the price will rise as well “On Tuesday, Macquarie stated in a note.
Return on equity (RoE), a key financial statistic, will also fall in the short run as a result of achieving certain regulatory obligations, according to the Macquarie research.
HDFC Ltd has a greater cost of funds than the bank since it is a shadow bank, or a financial company that operates outside of standard banking regulations.
According to a portfolio manager at a retail brokerage firm, the corporation may see a higher cost of capital in the short term as a result of the merger, which could harm its margin.
“As a result of this and other issues surrounding the deal and performance, the stock may not experience a significant valuation re-rating anytime soon,” he added.
HDFC Bank’s stock dropped about 3% on Tuesday, while HDFC Ltd’s stock dropped more than 2%. On Monday, both stocks had risen by roughly 10%.
If the deal goes through, HDFC Bank will close the size gap with state-run lender and bigger rival State Bank of India, as well as pull farther away from competitors like ICICI Bank and Axis Bank.
