HDFC vaults into ranks of world’s most valuable banks

A homegrown Indian company will for the first time rank among the world’s most valuable banks after completing a merger, marking a new challenger to the largest American and Chinese lenders occupying the coveted top spots. 

The tieup of HDFC Bank and Housing Development Finance Corp. creates a lender that ranks fourth in equity market capitalisation, behind JPMorgan Chase & Co, Industrial and Commercial Bank of China., and Bank of America Corp, according to data compiled by Bloomberg. It’s valued at about $172 billion. 

With the merger likely effective July 1, the new HDFC Bank entity will have about 120 million customers. It’ll also increase its branch network to more than 8,300 and boast of a total headcount of more than 1,77,000 employees.

In the charts below, we highlight the scale of this global banking giant and examine some of the challenges ahead for its stock price.  

Also read: RBI allows HDFC Bank to hold CPs issued till date by HDFC till their maturity

Market capitalisation

HDFC surges ahead of banks, including HSBC Holdings Plc and Citigroup Inc. The bank will also leave behind State Bank of India and ICICI Bank, with market capitalisations of about $62 billion and $79 billion, respectively, as of June 22. 

“Worldwide, there are very few banks, which can at this scale and size, still aspire to double over a period of four years,” Suresh Ganapathy, head of financial services research for India at Macquarie Group’s brokerage unit, said in a Bloomberg TV interview. The bank expects to grow at 18% to 20%, there is very good visibility in earnings growth, and they plan to double their branches in the next four years, he said. “HDFC Bank will remain a pretty formidable institution.”

Deposit growth

HDFC Bank has consistently outperformed its peers in garnering deposits and the merger offers another chance to grow its deposit base by tapping the existing customers of the mortgage lender. Some 70% of those customers do not have accounts with the bank. Arvind Kapil, retail head at the bank, last month said he plans to get them to open a savings account. 

The lender will be able to offer in-house home loan products to its clients as only 2% of them had a mortgage product from HDFC, according to a presentation when the merger was announced.

“The lifetime value of a customer’s relationship with that bank just enhances when you start to put a mortgage into his product offering,” Sashi Jagdishan, the bank’s chief executive, said at the time. 

Also read: SEBI sees no need to give more time to MFs for realigning portfolios in merger-bound HDFC twins

Confidence check

HDFC Bank, which counts JPMorgan among its largest investors, 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 — have outperformed its global peers. The perpetual dollar notes of HDFC Bank handed investors a return of 3.1% so far this year, even as Bloomberg’s index of global banks’ coco bonds lost 3.5%.

The aggregate index has clawed back 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 up less than the NIFTY Bank index over the past year. Ganapathy, the Macquarie 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. 

“Management is confident of sustaining 2% return on assets and possibly beyond that level even post-merger and also deliver strong loan growth. If they can walk the talk, the stock will re-rate,” Ganapathy said in a note.

Also read: RBI eases restrictions on HDFC Credila’s customer onboarding