HDFC Bank will become twice the size of ICICI Bank after it absorbs HDFC Ltd with itself, global rating agency S&P said.

While boosting market share and diversifying its revenues, HDFC Bank will remain the second-largest bank in India post-merger.

State Bank of India (SBI) is the largest bank in the country with about 25% market share. HDFC Bank currently has about 11% share.

The merger will lift HDFC Bank’s loans by 42% to Rs 18 lakh crore. The bank’s market share will increase to about 15% from 11% currently, S&P said.

HDFC, India’s largest housing finance company, is merging with the country’s largest private sector bank to create a behemoth. HDFC Bank’s larger balance sheet could enhance its wholesale lending opportunities.

The combined entity will have one-third of its portfolio in mortgage loans, compared with a reported 11% now, S&P said.

“HDFC Ltd.’s mortgage portfolio largely comprises individual housing loans. Such loans tend to be granular. Moreover, HDFC Ltd.’s insurance, asset management, and securities subsidiaries will further diversify the combined entity’s revenue profile,” S&P added.

However, profitability of the private lender in the shorter term could be hit due to statutory reserve requirements and priority sector lending regulations. But the merged company will benefit from economies of scale, ability to raise funds at competitive rates, and HDFC Bank’s digital capabilities. “In our view, HDFC Bank should be able to absorb incremental risks from this portfolio given its adequate capital and provisioning buffers,” the rating agency added.

S&P said the combined entity's earnings could improve over the next three to five years and the merger will provide the bank with profitable cross-selling opportunities to HDFC's large pool of customers.

"The merged bank will benefit from economies of scale and an improved ability to raise funds at competitive rates. It can also leverage HDFC Bank's digital capabilities and distribution network to drive operational efficiencies," it said.

S&P expects the combined entity's capitalisation and asset quality to be broadly in line with those of HDFC Bank on a standalone basis.

About 9% of HDFC Ltd's portfolio comprises loans to real estate developers, where the asset quality is weaker than for the rest of the bank's portfolio. "In our view, HDFC Bank should be able to absorb incremental risks from this portfolio given its adequate capital and provisioning buffers," the US-based rating agency said.