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Sources told Reuters last year that the Reserve Bank of India,
which acts as regulator for the financial industry, wants banks
to limit ownership 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 will include the target's insurance and other
financial subsidiaries.
HDFC Life and HDFC ERGO are among the leading life and general
insurance companies in the private sector, and analysts say the
RBI is unlikely to be comfortable with the size of the insurance
operations the deal will give the bank.
HDFC Bank's management said on Monday that they have asked the
regulator for clarity on complying with its rules, but analysts
believe it may not be easy to come by.
"Considering there are lot of subsidiaries that need to be
merged, there could be some regulatory overhang, particularly in
the insurance business where the central bank is not very
comfortable with banks increasing their stake," said an analyst
at a domestic brokerage house.
HDFC Bank did not immediately respond to a Reuters request for
comment on Tuesday. The RBI also did not respond to a request
for comment.
One way of folding the 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 enforced then the equation
changes. Cost goes up as stamp duties and taxes will go up,"
Macquarie said in a note on Tuesday.
In the short term, return on equity (RoE), a key financial
metric, will also go down as a result of meeting certain
regulatory requirements, the Macquarie note said.
As a shadow bank - a finance company outside the scope of
traditional banking regulation - HDFC Ltd has a higher cost of
funds compared to the bank.
Post merger, the entity may therefore in the short term also see
a higher cost of funds, which could affect its margin, said a
portfolio manager at a retail brokerage firm.
"Due to this and other ambiguities regarding the deal and the
performance, the stock may not see a big valuation re-rating
immediately," he added.
HDFC Bank shares fell as much as nearly 3% on Tuesday, while
HDFC Ltd slipped more than 2%. Both stocks had surged around 10%
on Monday.
If it clears the hurdles to a deal, HDFC Bank will shrink the
gap in size with state-run lender and bigger rival State Bank of
India, and pull further away from peers such as ICICI Bank and
Axis Bank.
(Reporting by Nupur Anand; Editing by Jan Harvey)
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