“The level of impact on cost of funds depends on the extent to which borrowings are replaced with fixed deposits,” said Pranav Gundlapalle, senior research analyst at Bernstein.
The cost of liabilities – used to replace HDFC Ltd’s borrowings – will slightly reduce the cost of borrowing, while replacing the borrowings with fixed deposits will reduce the cost of funds.
With the merger with HDFC Bank, HDFC Limited’s portfolio will shift to a single bank format and attract diverse banking needs priority sector loan out (psl), Statutory Liquidity Ratio (SLR), and Cash Reserve Ratio (CRR). Lower cost of borrowing as a bank vs NBFC or even better if it can replace borrowing with fixed deposits, as an advantage even though borrowing remains the primary source of funds, its cost There will be shortage. Gundlapalle said bank spreads while borrowing are narrow compared to NBFCs with similar ratings, so the conversion would be beneficial.
“Also, as NBFCs start getting fixed or CASA deposits, the cost of funds will start coming down as compared to more expensive sources of funds like debentures, term loans, borrowings,” he said.
It also said that the 30% discount HDFC Bank is trading at will reverse quickly till the merger is complete.
“HDFC Bank is valued at a significant discount, around 30%, to the long-term average. Prior to the merger with its parent company, HDFC Ltd. – the discount is unfair and looks set to reverse quickly. We reiterate outperform and set a target price of Rs 2,200,” said Gundlapalle.
Bernstein also noted that HDFC Ltd’s portfolio merger does not appear to have any impact on HDFC Bank’s RoRWA (Return on Risk Weighted Assets).
HDFC Ltd’s RoRWA, as an NBFC, is healthy at 3.3% in FY22 versus HDFC Bank’s 2.9%.
“Upon conversion into a bank, we expect the PBT of HDFC Limited to decline by approximately 11%, bringing its RoWA in line with that of HDFC Bank and thus have no impact on HDFC Bank’s post-merger RoWA, ‘ said the note.