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Will HDFC and HDFC Bank merge to form the second largest bank in the country?

Tuesday, 22 July 2014 - 6:10am IST | Place: Mumbai | Agency: dna

Merger will create the second-largest bank by assets after SBI

Home financier HDFC and HDFC Bank may merge themselves to create the second-largest bank by assets in the country after State Bank of India (SBI) if "economies of scale prove beneficial" to both.

Ever since the Reserve Bank of India (RBI) allowed banks to float special infrastructure bonds exempting them from reserve requirements and priority sector responsibilities and put an icing on the cake by adding affordable housing also as special category, exempting it from reserve requirements, speculation has been rife over a possible merger between HDFC Bank and its parent HDFC.

Keki Mistry, vice-chairman and chief executive officer, HDFC, told dna, "At an appropriate time, we will look at the merger. But now, there is nothing on the table. Today, we had a board meeting but nothing on this was discussed. There is a regulatory advantage now but we need to see the quantum of reduction in our cost of funding."

Under RBI norms, a bank needs to set aside 4% of its deposits as CRR (Cash Reserve Ratio) and 22.5% in government bonds. Under these regulations, HDFC would have to transfer its assets to the bank. If the two entities merge, it will become the second-largest bank in the country after SBI by assets.

Paresh Sukthankar, deputy managing director, HDFC Bank, told analysts on Monday after announcing its quarterly financial results, "The regulations by themselves do not warrant a merger. We will have to study the ramifications and see whether there is some merit on coming back to the drawing board."

HDFC Bank on Monday informed the BSE that the media report on the merger is incorrect and no such proposal is being considered.

On Monday, HDFC reported a 14.6% growth in its net profit to Rs 1,344.60 crore for the quarter ended June 30.

Net interest income, which is the difference between interest earned and interest paid, rose to Rs 2,115 crore, up 18% year-on-year, as compared to Rs 1,793.60 crore reported in the corresponding quarter of last fiscal. Net Interest Margins (NIMs) contracted marginally on a sequential basis to 3.8% as compared to 4.1% reported in the previous quarter.

CLSA in a report said that the topline rose by 18% YoY, led by 15% growth in NII and stronger growth in fees and dividend income and this led the 20% growth in pre-tax profit.

Net profit growth of 15% YoY lagged pre-tax profit growth due to 300 basis points increase in tax rate to 30% (following change in norms on deferred tax liability). On the lending side, loan growth moderated to15% YoY and growth in corporate segment (11% vs 17% growth in retail segment) reflects the management's cautious stance on asset quality.

"We believe that growth in corporate segment can pick-up as the development activity picks-up and confidence on corporate cycle improves."

On Monday, HDFC shares moved up 2.82% to Rs 1,008.75 on BSE, while the benchmark index Sensex gained 0.28% to 25,713.62 points. HDFC Bank shares were down 0.43% to Rs 828.90 and the banking index Bankex gained 0.31% to 17,666.04 points

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