Bangkok A new banking giant is emerging in India that is betting on the rapid rise of the middle class with ambitious growth plans. The subcontinent’s largest private financial institution, HDFC Bank, is currently in the final stages of a record merger that will catapult it into the list of the five largest banks in the world in one fell swoop.
With a market capitalization of more than $180 billion, India’s new financial behemoth ranked fourth among the world’s largest banks, according to data from Bloomberg earlier this month – ahead of industry giants such as HSBC, Wells Fargo, the Bank of China and Morgan Stanley.
The company owes its rise to the global financial elite to the merger with its previous parent company, the Housing Development Finance Corporation (HDFC) – India’s largest private mortgage provider to date. Following regulatory approval, the merger announced last year – the largest in India’s corporate history – officially went into effect at the beginning of the month.
The last important step is the exchange of HDFC shares for shares in HDFC Bank. This exchange, scheduled for next week, will involve assets worth more than $60 billion.
The transaction makes HDFC Bank the second most valuable listed company in India. Only multi-billionaire Mukesh Ambani’s conglomerate Reliance, which operates oil refineries, retail chains and a mobile operator in India, is larger, with a market cap of more than $210 billion.
Bank plans 1,500 new branches per year
Like Ambani, the merged HDFC Bank can claim to have deep roots in the emerging market of 1.4 billion people: the company now has 120 million customers, almost 180,000 employees and more than 8,000 branches.
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CEO Sashidhar Jagdishan doesn’t want to leave it at that. He is pursuing an aggressive growth strategy and hoping to meet the growing need for financial services in the world’s most populous country. “We are lucky to be in India,” Jagdishan wrote to his staff over the weekend. According to forecasts, the country’s economic output will increase from $3.5 trillion to $8 trillion in the coming decade. “The market for financial services and mortgages, which is currently underserved and poorly penetrated, will be very large,” Jagdishan wrote.
Under his leadership, HDFC Bank wants to open more than 1,500 new branches every year for the foreseeable future “to appeal to the aspiring middle and upper classes in this huge country”. Jagdishan expects his business to multiply rapidly: “At the rate we want to grow, we could set up a new HDFC bank every four years,” wrote the 58-year-old bank boss, who has spent almost three decades at HDFC has worked its way up to become one of the most powerful financial managers in India.
About three years ago, the bank’s IT systems went down, leaving customers without access to their money for hours.
(Photo: Reuters)
Analysts in India are impressed: There are not many banks of this size in the world that have the ambition to double in size in four years, commented Suresh Ganapathy, India analyst at the financial services provider Macquarie. Economists at Bank Morgan Stanley expect loan growth to pick up significantly due to synergies in the merged bank, setting their price target around a quarter above current levels.
The HDFC bankers hope that existing mortgage customers of the former parent company will ask for more financial services. At the same time, more real estate financing is to be advertised to the previous account holders of HDFC Bank. “From the bank’s perspective, this is a great cross-selling opportunity,” said HDFC Bank board member Keki Mistry.
Problems with IT burden the bank
The real estate financing business is one of the biggest hopes for growth in India’s financial sector. So far, the volume of mortgages in the country corresponds to only eleven percent of economic output. According to the HDFC, it is significantly higher in China at 26 percent. The countries in Southeast Asia also come up to 20 to 40 percent. The industry expects that rising household incomes and government support programs will allow the demand for loans in India to increase noticeably – despite rising interest rates.
In total, HDFC Bank’s loan portfolio now amounts to almost 275 billion US dollars. In this key figure, however, it is still in second place in India – behind the state bank SBI, which has more than 300 billion dollars in loans.
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The battle for the top position is unlikely to be easy for HDFC: the bank’s rapid growth already reached its limits almost three years ago. At that time, the bank’s central IT systems were down for twelve hours. During this time, customers no longer had access to their money via ATMs or digital payment services.
It wasn’t the first serious failure in the IT systems. The financial regulator then ordered that the bank was temporarily no longer allowed to issue new credit cards. However, the measure has since been lifted. Bank boss Jagdishan now has to prove to customers and regulators that his technology can withstand the expected growth in the coming years.
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