A service of

Size matters: M&A among Indian banks set to balloon following blockbuster merger

A landmark deal in India could herald a slew of M&A transactions between banks and non-banking financial companies (NBFCs) in the South Asian nation, as lenders bet on boosting size to cut the cost of funds, while NBFCs wrestle with more stringent regulatory requirements.

The USD 60.8bn mega-merger this month between Housing Development Finance Corporation Limited (HDFC Ltd) [BOM:500010] and HDFC Bank [NYSE:HDB] is the biggest deal ever recorded in India, and the world’s third-largest commercial banking deal ever, according to Dealogic records.

The transaction is expected to turbocharge the combined entity’s capacity to cross-sell banking and housing finance products – a timely move in an increasingly competitive and crowded housing finance industry, which includes the likes of LIC Housing Finance, Bank of Baroda Housing and PNB Housing.

Imitation game: rivals expected to step up M&A activity

This blockbuster merger will put pressure on competitors to follow suit and explore M&A options to become bigger and stronger.

Kotak Mahindra Bank [BOM:500247] is likely to weigh up M&A opportunities, including potential mergers, with other private domestic lenders such as Yes Bank [BOM:532648; NSE:YESBANK], IDFC First Bank [BOM:539437], and Federal Bank [BOM:500469], according to The Economic Times.

Speculation persists that Kotak Mahindra Bank has an interest in buying a smaller-sized niche bank, or even reviving previously mothballed plans to acquire IndusInd Bank [BOM:532187] or Axis Bank [BOM:532215].

The exit of a number of Western players is also generating opportunities in the commercial banking sector for Indian lenders. Axis Bank last month agreed to acquire Citibank’s [NYSE:C] consumer businesses in India for up to INR 123.25bn (USD 1.62bn). This follows similar disposals by the US bank in Indonesia, Malaysia, Thailand, Vietnam and Taiwan.

Indian banks could even look beyond peers and seek mergers with NBFCs that have complementary credit profiles. Following the collapse of some NBFCs in 2018 and 2019, policymakers have been tightening the regulatory framework governing India’s NBFC industry, bringing it closer in line with the banking sector.

A private function: sales of state-run banks offer further opportunities

The privatization of state-run lenders could become another catalyst for heightened activity across the sector. Last month, undisclosed Indian officials told The Mint that the government aims to privatize at least one bank by September.

Possible candidates include IDBI Bank [BOM:500116], Indian Overseas Bank [BOM:532388], Central Bank of India [BOM:532885] and Bank of Maharashtra [BOM:532525]. Public-sector banks’ need for greater capital infusion to satisfy tighter capital-reserve requirements could expedite the process.

Moreover, Indian policymakers are preparing to amend the country’s Banking Regulation Act in order to remove a 20% ceiling on ownership by foreign entities in banks run by the government.

This might not be exclusive to industry players, with private-equity (PE) firms poised to seize stakes in public-sector banks. Global PE houses Carlyle and Advent are reportedly looking to acquire stakes of up to 10% each in Yes Bank, while RBL Bank [BSE:540065; NSE:RBLBANK] is thought to have approached undisclosed PE firms for funds in exchange for a stake, according to The Economic Times and Bloomberg.