Citi top foreign bank, HDFC maintains HDFC Bank stake - Is consolidation on cards?

After 6 years, Citi has displaced Standard Chartered Bank to become India’s largest foreign bank. Citi’s assets are at Rs 66,358 crore while India’s second largest private bank, HDFC Bank’s assets are at Rs.91,235 crore as on March 31, 200.

Citi has the largest NBFC network in India and derive 70% from corporate and investment banking 30% from retail side. Though, it is beefing up its retail operations to earn more from it.

Citigroup has a 12.3% stake in HDFC and also subscribed to HDFC’s recent preferential allotment, thus forging a belief that once 2009 steps in and RBI grants more operation freedom, HDFC Bank would be the first choice for Citi to expand its operations in India.

Once the banking sector opens up, the industry would become highly competitive and only large scale players would survive. So mergers and acquisitions would become the order of the day and following ICICI Bank’s example, a reverse merger between HDFC Bank and its parent is imminent.

ICICI Bank and HDFC Bank got licences at the same time but today the former is six times bigger than the latter. In the latest private placement, HDFC has maintained its 22% stake in HDFC Bank. This assumes significance, as during last three HDFC Bank issues, HDFC has refrained from it.

Another positive indication for a Citi-HDFC merger is the fact that Citibank branches are selling HDFC’s home loans and are also assisting in its AMC and both are increasing their business by cross selling products.

The roadblock to the merger is the high cost of buying government securities to meet the SLR requirements, the macro-environment and regulatory atmosphere. But considering HDFC Bank’s quality balance sheet, it could command a good premium for being an acquisition candidate.