The $40 billion takeover of the largest shareholder by India’s largest private lender HDFC Bank could face regulatory hurdles due to the stake it would give the bank in the insurance sector, analysts said.
Sources told Reuters last year that the Reserve Bank of India, which acts as the regulator of the financial industry, wants banks to limit ownership interests in insurance companies.
HDFC Bank’s acquisition of HDFC Ltd, announced Monday, will create a company with total assets worth US$237 billion and will include the target company’s insurance and other financial subsidiaries.
HDFC Life and HDFC ERGO are among the top private-sector life and non-life insurance companies, and analysts say RBI is unlikely to be happy with the size of the insurance business the transaction will bring to the bank. HDFC Bank management said Monday they have asked regulators for clarity on how their rules are being followed, but analysts believe it may not be easy to get.
“Considering that many subsidiaries will have to be merged, there could be a regulatory backlog, particularly in the insurance business, where the central bank isn’t very happy with banks increasing their stake,” said an analyst at a domestic brokerage firm.
HDFC Bank did not immediately respond to a Reuters request for comment on Tuesday. RBI also did not respond to a request for comment.
One way to incorporate the subsidiaries into HDFC Bank could be to create a holding structure, but that could have a negative impact on the balance sheet in the near term, analysts said.
“When a holding company structure is enforced, the equation changes. Costs go up as stamp duties and taxes rise,” Macquarie said in a note Tuesday.
In the near term, return on equity (RoE), a key financial metric, will also decrease due to compliance with certain regulatory requirements, Macquarie said in the release.
As a shadow bank – a financial company outside the scope of traditional banking regulation – HDFC Ltd. higher financing costs compared to the bank.
As a result, the company could also face higher funding costs in the near term post-merger, which could impact its margin, said a portfolio manager at a retail brokerage firm.
“Due to this and other ambiguities surrounding the deal and performance, the stock may not see a major re-rating right away,” he added.
Shares in HDFC Bank fell nearly 3% on Tuesday, while HDFC Ltd fell more than 2%. Both stocks were up around 10% on Monday.
If the hurdles to an agreement are cleared, HDFC Bank will close the gap on the state lender and larger rival State Bank of India, and move further away from competitors such as ICICI Bank and Axis Bank.
