HDFC Bank-HDFC merger: HDFC Bank could see drop in cost of funds post merger with parent HDFC Ltd: Bernstein


The merger between HDFC Bank and HDFC Ltd could potentially lead to lower cost of borrowings of upto 90 basis points for the lender, research house Bernstein has said. In a base case scenario Bernstein expects cost of borrowings to be lower by 40 basis points post the merger while in a bill base it expects cost lower by 90 bps.

“On cost of funds the level of impact depends on the extent to which the borrowings are replaced by term deposits,” said Pranav Gundlapalle, senior research analyst, Bernstein.

The cost of the liabilities used to replace HDFC Limited’s borrowings — would drive a slightly lower cost of borrowings versus while replacing borrowings with term deposits will further lower the cost of funds.

With the merger with HDFC bank, HDFC limited’s portfolio will move into a bank format and attract various banking requirements such as Priority Sector lending (PSL), Statutory Liquidity Ratio (SLR), and Cash Reserve Ratio (CRR). As a benefit, it will see its cost of funds decrease even if borrowings remain the primary source of funding, assuming a lower cost of borrowing as a bank versus NBFC or even better if it can replace borrowings with term deposits.
Gundlapalle added that bank spreads while borrowing, are narrower than similarly rated NBFCs, so that would be a benefit from conversion.

“In addition, as the NBFC starts gaining term or CASA deposits, its cost of funds would start declining versus the more expensive sources of funding like debentures, term loans, borrowings,” he said.

It also said that the 30% discount that HDFC Bank is trading at would reverse quickly till the time the merger is consummated.

“HDFC Bank is valued at a significant discount, nearly 30% to long-term average. Ahead of the merger with its parent, HDFC Ltd — the discount is unwarranted and set to reverse quickly. We reiterate outperform and set a target price of Rs 2,200,” said Gundlapalle.

Bernstein has also noted that it sees no impact to HDFC Bank’s RoRWA (Return on Risk Weighted assets), from merging HDFC limited’s portfolio.

HDFC Limited’s RoRWA, as an NBFC, is healthy at 3.3% in FY22 versus 2.9% of HDFC Bank.

“On conversion into a bank, we expect HDFC Limited’s PBT to decline by nearly 11% bringing its RoRWA in line with HDFC bank and thereby causing no impact to HDFC Bank’s post-merger RoRWA,” the note said.

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *

%d bloggers like this:
Available for Amazon Prime