By Nupur Anand
MUMBAI (Reuters) – India’s biggest private lender HDFC Bank’s acquisition of its largest shareholder for $40 billion could face regulatory hurdles over the stake it would give the bank in the insurance industry, analysts said.
Sources told Reuters last year that the Reserve Bank of India, which acts as a financial sector regulator, wants banks to limit stakes in insurance companies.
HDFC Bank’s acquisition of HDFC Ltd, announced on Monday, will create an entity with a combined balance sheet worth $237 billion and include Target’s insurance and other financial subsidiaries.
HDFC Life and HDFC ERGO are among the leading private sector life and general insurers, and analysts say the RBI is unlikely to be comfortable with the size of insurance operations the deal will give to the bank.
HDFC Bank management said on Monday it had asked the regulator for clarification on compliance with its rules, but analysts said that may not be easy to come by.
“Since there are a lot of subsidiaries that need to be merged, there could be some regulatory overrun, especially in the insurance sector where the central bank is not very comfortable with banks increasing their stake,” said an analyst at a national brokerage.
HDFC Bank did not immediately respond to a request for comment from Reuters on Tuesday. The RBI also did not respond to a request for comment.
One way to consolidate subsidiaries into HDFC Bank could be to create a holding company structure, but that could have a negative impact on the balance sheet in the short term, analysts said.
“If a holding company structure is applied, the equation changes. The cost increases as stamp duties and taxes increase,” Macquarie said in a note Tuesday.
In the near term, return on equity (RoE), a key financial metric, will also decline due to meeting certain regulatory requirements, according to Macquarie’s note.
As a shadow bank – a financial company outside the scope of traditional banking regulation – HDFC Ltd has a higher cost of funds than the bank.
Post-merger, the entity could therefore also see a higher cost of funds in the short term, which could affect its margin, said a portfolio manager at a retail brokerage firm.
“Due to this and other ambiguities regarding the deal and performance, the stock may not see a material revaluation immediately,” he added.
Shares of HDFC Bank fell almost 3% on Tuesday, while HDFC Ltd fell more than 2%. Both stocks had jumped about 10% on Monday.
If it removes barriers to a deal, HDFC Bank will narrow the size gap with state-run lender and biggest rival State Bank of India, and move further away from peers such as ICICI Bank and Axis Bank. .
(Reporting by Nupur Anand; Editing by Jan Harvey)