For the merger of HDFC Ltd with HDFC Bank, the Reserve Bank of India’s (RBI) approval will be a key monitorable as the bank will end up owning large stakes in the life-insurance, general-insurance and AMC (asset management company) businesses.

Another concern is the impact the merger will have on the merged entity’s profit and loss. “While the merger will increase the bank’s product portfolio and ability to cross-sell, we think there will also be a drag on its P&L due to priority sector lending (PSL) requirements and higher SLR/CRR requirements,” Macquarie said in a note.

Post-merger, HDFC Bank will own 48% in the life, ~50% in the general insurance and 69% in the AMC entities of the group. Recently, the RBI did not allow Axis Bank to directly own more than 10% in Max Life while ICICI Bank was asked to bring down shareholding in ICICI Lombard to less than 30%.

As per Macquarie’s rough calculations, HDFC Bank will have an excess SLR (statutory liquidity ratio) and CRR (cash reserve ratio) asset requirement of Rs 70,000-80,000 crore and will also need an incremental Rs 90,000 crore agriculture portfolio, based on 18% borrowings to meet PSL norms.

“These low-yielding portfolios could be a drag on the merged entity’s P&L,” the brokerage said.

The merger will  create a banking, financial services and insurance sector behemoth. This will have critical implications for the BFSI sector, said Macquarie.

The merger will widen product coverage for HDFC Bank. As per management, ~70%  of HDFC Bank customers do not have mortgages from HDFC Ltd. “We think the merger has direct implications for the sector as it increases competitive intensity. There is also a clear read-through that larger non-banking financial companies (NBFCs) will have to convert into banks to thrive as the regulatory gap between banks and NBFCs gets rationalised further,” Macquarie analysts Suresh Ganapathy and Param Subramanian wrote in a note.

Technical gains from FII (foreign institutional investors) headroom will be limited. FII shareholding in HDFC Bank post-merger would be nearly 66% versus the 74% cap. Hence there is an enhanced gap of 7-8% against 4% currently for FIIs to hold the stock. However, the inclusion of the merged HDFC Bank in the index may be difficult as MSCI India requires a larger FII headroom (from cap) for inclusion, the brokerage pointed out.

Noting ICICI’s case, it said the bank had undergone a similar group merger in 2002. Current account savings account (CASA) for ICICI (as % of total funding) dropped from 26% (FY01) to 9% in FY03 and recovered to the 30% level only by FY10.

In Macquarie’s view, refinancing HDFC Ltd’s funding with low-cost deposits will be key for the success of the merger. HDFC Bank’s effective CASA could go down to 35% from 47% post-merger.

The merger is expected to solve the management succession problem at HDFC Ltd. The merged entity will include all senior management personnel of HDFC Ltd. While Keki Mistry will serve as a non-executive director on the board,

Deepak Parekh will not serve on the board due to age caps. “We believe the merger solves the succession problem at HDFC Ltd to a great extent,” Macquarie said.