The merger of parent HDFC with HDFC Bank will make it one of the world’s most valuable banks, marking a new challenger to the largest American and Chinese lenders occupying the coveted top spots. 

The merged lender will rank fourth in equity market capitalisation, behind JPMorgan Chase & Co., Industrial and Commercial Bank of China Ltd (ICBC) and Bank of America Corp., according to data compiled by Bloomberg. The valuation of the combined entity is pegged at about $172 billion. 

While JPMorgan Chase has a current market capitalisation of $417 billion, ICBC and Bank of America are valued at $228 and $227 billion, respectively.

ICICI Bank, the second most valued Indian bank by market cap, is valued at $80 billion while state-owned State Bank of India (SBI) has a market cap of $62 billion (30 June close). 

The new HDFC Bank will be the second most valued company in India after Reliance Industries Ltd (RIL), which has a market cap of $210 billion (30 June).

The merger is likely effective 1 July. The new HDFC Bank entity will have around 120 million customers, its branch network will increase to over 8,300 and the headcount will touch over 177,000 employees.

In a report, Bloomberg has highlighted the scale of this global banking giant and examined some of the challenges ahead for its stock price.  

Market Capitalisation 

HDFC surges ahead of banks including HSBC Holdings Plc and Citigroup Inc, Bloomberg said in its report. 

The bank will also leave behind its Indian peers State Bank of India and ICICI Bank, with market capitalisations of about $62 billion and $79 billion, respectively, as of June 22. 

“Worldwide there are very few banks, which can at this scale and size, still aspire to double over a period of four years," Suresh Ganapathy, head of financial services research for India at Macquarie Group Ltd.’s brokerage unit, said in a Bloomberg TV interview. 

The bank expects to grow at 18% to 20%, there is very good visibility in earnings growth, and they plan to double their branches in the next four years, he said. “HDFC Bank will remain a pretty formidable institution."

Deposit Growth

HDFC Bank has consistently outperformed its peers in garnering deposits and the merger offers another chance to grow its deposit base by tapping the existing customers of the mortgage lender, Bloomberg reported. 

Some 70% of those customers do not have accounts with the bank. Arvind Kapil, retail head at the bank, last month said he plans to get them to open a savings account. 

The lender will be able to offer inhouse home loan products to its clients as only 2% of them had a mortgage product from HDFC Ltd., according to a presentation when the merger was announced.

“The lifetime value of a customer’s relationship with that bank just enhances when you start to put a mortgage into his product offering," Sashi Jagdishan, the bank’s chief executive, said at the time. 

Confidence Check

HDFC Bank, which counts JPMorgan among its largest investors, is enjoying high levels of investor confidence, according to the Bloomberg report. 

Its contingent convertible bonds — the riskiest type of debt that can convert to equity if a lender runs into trouble — has outperformed its global peers. The perpetual dollar notes of HDFC Bank handed investors a return of 3.1% so far this year, even as Bloomberg’s index of global banks’ coco bonds lost 3.5%.

The aggregate index has clawed back some of its underperformance in recent months after the turmoil caused by a controversial wipeout of Credit Suisse Group AG’s bonds eased, Bloomberg reported. 

Stock Performance

HDFC Bank shares are up less than the NIFTY Bank index over the past year. 

Ganapathy, the Macquarie analyst, reckons the stock’s performance will depend on the growth of the loan book at 18% to 20%, and a 2% return on assets, Bloomberg reported. 

“Management is confident of sustaining 2% return on assets and possibly beyond that level even post-merger and also deliver strong loan growth. If they can walk the talk, the stock will re-rate," Ganapathy said in a note.