HDFC Bank – HDFC Ltd merger could face insurance hurdle
Even as the stock markets were celebrating the $40 billion merger of HDFC Ltd with HDFC Bank, a new hurdle has cropped up. This hurdle pertains to the life and general insurance businesses of the HDFC group, which are currently owned by HDFC Ltd.
The hurdle could come in the form of objections from the RBI over the stake that it would give the bank in the insurance sector. Typically, RBI has been averse to banks foraying into insurance.
As per recent statements made by the RBI, it has always wanted the banks in India to limit its ownership stakes in insurance companies. Now the merger of HDFC Ltd and HDFC Bank would create a behemoth with assets of close to $240 billion.
However, the challenge is that the life and general insurance subsidiaries of HDFC Ltd will have to transition into HDFC Bank. That would include HDFC Life Insurance and HDFC Ergo General Insurance.
Now these are not small players in the industry. HDFC Life is the predominant players in the life insurance industry (among the private sector players) while HDFC ERGO is among the leading general insurance companies in the private sector.
Clearly, the RBI would not be comfortable with these two insurance companies being directly owned by HDFC Bank, especially considering the size of insurance operations that it would give to HDFC Bank.
As per the statements coming from HDFC Ltd and HDFC Bank managements, they have already sought the opinion of the RBI for clarity on complying with its rules.
However, the RBI is going to be unwilling to offer such an approval, especially considering the size and the systemic importance of all the companies in this story. This would be contrary to the RBI stand on not allowing banks to increase their stake in the insurance subsidiaries.
There are ways to get round this challenge. For instance, one option would be to create a holding company structure that would hold these insurance companies instead of HDFC Bank directly owning stakes in these insurance businesses.
However, that will have an impact on the balance sheet and also costs like stamp duties and taxes would escalate. This may have a negative impact on the ROE, a key metrics in determining the P/E ratio.
While the final contours of the deal are not clear, one thing is clear that the deal will give HDFC Bank tremendous heft in the market. It will get closer to SBI in terms of banking reach and total business.
HDFC Bank will also widen the leadership gap it already has over ICICI Bank and Axis Bank in the Indian market. However, for that to happen, the dilemma over managing and structuring the insurance business has to be sorted out first.
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