regular-article-logo Tuesday, 06 June 2023

Street cold to HDFC merger

Some analysts wonder how the merged entity would build its priority sector lending portfolio

Our Special Correspondent Mumbai Published 25.05.22, 03:18 AM
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Representational Image File Photo

The Reserve Bank of India (RBI) is likely to “reach a conclusion” on the HDFC-HDFC Bank merger application shortly. Some brokerages have already lowered the target price of the merged entity, with the stock correcting since the merger announcement.

Last week, it had hit a 52-week low of Rs 1,278.30. The lender on Tuesday closed at Rs 1,318.95.


On April 4, when the merger was announced, the lender had ended at Rs 1,656.45. It has thus fallen 20 per cent from these levels.

Apart from selling by foreign portfolio investors, market circles have attributed the crash to concerns over rising costs such as CRR and SLR which HDFC does not have to maintain on its deposits.

Some analysts also wondered how the merged entity would build its priority sector lending portfolio. There have been apprehensions also about how the RBI will treat HDFC’s holding in the insurance and asset management businesses that will go to the bank.

In a latest note, analysts at Emkay gave a target price of Rs 1,800 for the merged bank against Rs 1,950 earlier, albeit with a buy rating.

While the RBI norms says that either banks must have at least 50 per cent stake in a life insurance company or below 30 per cent, some of the regulator’s decision like not allowing Axis Bank to directly own more than 10 per cent in Max Life and directing ICICI Bank to bring down shareholding in ICICI Lombard to under 30 per cent has led to uncertainty among investors.

In a latest note, analysts at Emkay gave a target price of Rs 1,800 for the merged bank against Rs 1950 earlier, albeit with a buy rating.

They however, added for HDFC Bank, the merger of the housing portfolio could be return on equity (RoE) dilutive in the near term due to regulatory costs, though it would bring scale, security and higher portfolio tenure.

They added that the RBI may have reservations in approving the proposed merger deal structure with non-lending businesses (mainly insurance with current stakes over 30 per cent) under the bank, as it will challenge its longstanding stance to ring-fence banks and avoid regulatory overlap. The brokerage further pointed out that allowing NBFCs like HDB Financial Services and HDFC Credila as subsidiaries under a bank could also be difficult given the central bank’s insistence to undertake lending business primarily under the bank.

In an interview with CNBC TV-18 on Monday, RBI Governor Shaktikanta Das said that the merger application of HDFC and HDFC Bank is under its consideration and that it should be able to reach a conclusion in the near future.

Axis MF widens probe

Axis Mutual Fund has widened the scope of its investigation pertaining to allegations of irregularities against two fund managers, Amitabh Chaudhry, managing director and CEO of Axis Bank, said in an interaction with CNBC TV-18 on the sidelines of the World Economic Forum 2022 at Davos.

“One of the individuals was a fund manager as well as an equity analyst, so it is important that we look at all the analysts. So, we have expanded that scope,” he said.

The Axis Bank chief added that the investigation will continue for four-six weeks as Axis MF is still examining a few more things even as action has been taken on what it has unearthed so far.

The fund house had earlier removed two fund managers amid speculation of front running, a malpractice where a market participant has advance information about a transaction in a stock by an institutional investor and trades in that scrip to benefit from it.

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