What is imapct of HDFC Merger?

These days, the environment at the Ghaziabad Registry Office is very quite. This is because, due to the merger of HDFC Limited, many homebuyers and real estate developers, are facing significant difficulties in obtaining loans. This challenge or dilemma is not limited only to builders or homebuyers. It also affects all those stakeholders associated with HDFC Limited in some way, including those who were connected with HDFC Limited in the NBFC or housing loan segment. However, after the merger, the imposition of banking regulations on HDFC has impacted the business of all these entities, both positively and negatively. Let’s understand it.

First of all let’s look at the impact of inexistence of HDFC:

On April 4, 2022, the announcement was made regarding the merger of HDFC Limited with HDFC Bank. Prior to this, in the fiscal year 2021-22 (FY22), HDFC Limited held a 31% market share in the housing loan market, amounting to approximately ₹22.5 lakh crore. HDFC Limited’s loan book was over ₹7 lakh crore. Within the retail segment of the housing loan market, banks held a 60% market share, while Housing Finance Companies (HFCs) held a 38% market share. The top 5 lenders, including both banks and HFCs, accounted for around 80% of the market share in the home loan segment. Apart from the retail segment, the company also had a significant exposure in the non-retail segment, including developer financing and construction finance. However, the non-retail book constituted less than one-third of the company’s total portfolio.

Margins are better in construction financing as compared to developer financing, as companies tend to charge a higher spread in developer financing. However, asset quality issues also exist in this segment due to risks associated with the real estate business.

Let’s look at current situation of housing loan market:

The market share of Housing Finance Companies (HFCs) in the housing loan market will decrease, while that of banks will increase, which is natural due to the merger of HDFC. However, one thing to consider is that HFCs might increase their focus on developer finance or non-retail loans. ICRA has revised the growth outlook for the entire sector for FY24 to 18-20%, up from the previous 12-14%. According to ICRA, the expansion in the unsecured loan segment will support growth. According to experts, there might not be much impact on HDFC Limited’s existing loan book, which has moved to the bank, but there could be an impact on incremental loans. Moreover, Affordable housing, which pertains to loans for affordable homes, is an area where HFCs’ growth has been better. This is because there is relatively less competition from banks in this segment.

There is another aspect to this merger, and that is the impact on HDFC’s bondholders. There are concerns about the challenges faced by investors who fund the NBFC sector. This is because significant borrowers in the NBFC sector have exited, making it necessary for investors to seek alternative options, especially mutual fund managers. Mutual fund managers will need to explore alternatives among good companies issuing debt securities.

With HDFC’s departure, the pool of funds raised through the bond market will decrease. However, there is still stability in demand, meaning that there haven’t been any changes in those who provide capital. According to SEBI regulations, mutual funds can invest up to 30% of their total AUM (Assets Under Management) in debt securities issued by NBFCs and Housing Finance Companies (HFCs). According to Crisil’s report, the outstanding amount of HDFC’s bonds was ₹2.64 lakh crore (or $32.18 billion).

Now  question is who will fill this gap? Which companies will benefit?

Other companies in the NBFC sector will benefit from this, as they will be able to raise funds at lower rates. This is because these companies will be able to obtain capital at cheaper rates due to the cessation of HDFC’s issuance of debt securities. The company will now rely on HDFC Bank’s deposits for lending.

Fund managers believe that LIC Housing Finance, a competitor to HDFC, will likely benefit the most from HDFC’s exit from the sector. Not only that, but there could also be an increase in demand for debt issuances from other companies like ICICI Home Finance, Bajaj Housing Finance, Tata Capital Housing Finance, and Shriram Housing Finance. This is because these companies are well-established, already operational, and have an established risk profile.

Now, from an investor’s perspective, it’s crucial to understand two aspects – one for those who hold shares of HDFC Bank, and the other for those interested in investing in the housing finance sector. According to Market Expert Santosh Singh, investors who hold HDFC Bank shares should consider holding their positions because the bank still has a significant portion of its business in the NBFC sector, which has been acquired in the form of HDFC Limited’s subsidiary companies. The merger of HDFC is likely to benefit companies like LIC Housing, PNB Housing, Canfin Homes, Aavas Financiers, and Home First the most. If someone intends to invest in the housing finance sector, from a one-year perspective, they should consider buying LIC Housing around ₹550-600 and Canfin Homes with a target of ₹900 in case of a dip.

Overall, with HDFC’s exit from the NBFC sector, there might not be a significant shift in the market share of the housing loan segment. However, LIC Housing and PNB Housing could find it easier to raise funds, potentially leading to a slight softening of interest rates. In terms of incremental growth, the other companies in the sector are also likely to benefit.