HDFC Bank, HDFC market capitalisation falls nearly ₹88,000 crore after MSCI tweak

• India’s financial services giants HDFC Bank and HDFC witnessed a selloff on Friday, with their stocks falling by over 6% each.
• This resulted in the combined market capitalisation of the two companies falling by almost ₹88,000 crore.
• While the market participants were expecting MSCI to double the index weight of the merged entity, the index provider retained its weightage – analysts now expect outflows of up to $200 million as a result.

India’s financial services giants HDFC Bank and HDFC witnessed a selloff on Friday, with each of their stocks falling by over 6% leading to a decline of ₹87,945 crore in their combined market capitalisation.

This is after index provider MSCI announced a tweak that will result in the weightage of the merged entity remaining the same, likely leading to outflows of up to $200 million. This is contrary to the street expectations of MSCI doubling the index weightage of the merged entity, which would have resulted in inflows of up to $3 billion.

“Based on the estimated post-event foreign room of HDFC Bank and pursuant to the MSCI Corporate Events Methodology, to reduce the risk of reverse turnover, MSCI intends to add HDFC Bank to Large Cap Segment of MSCI Global Standard Indexes with a foreign inclusion factor (FIF) of 0.37 after applying an adjustment factor of 0.5,” MSCI said in a statement.

While the market expectation was an adjustment factor of 1x, MSCI’s tweak has instead used an adjustment factor of 0.5x. According to the analysts at Nuvama Research, this could result in foreign portfolio investor (FPI) outflows of up to $200 million.

“We had estimated the foreign room for the merged entity to be around 18% which is above 15% and above the MSCI threshold to maintain stock with full factor. However, as per the current methodology, the weighting of the merged entity would be again reduced in the next quarterly index reviews if the foreign room would have come below 15%,” said a note by Nuvama.

This has resulted in the stocks of HDFC twins tanking by over 6% in morning trade on Friday.

Company	CMP	Mcap change
HDFC Bank	₹1,728	-₹59,063 crore
HDFC	₹2,862	-₹28,882 crore
Total		-₹87,945 crore

Source: NSE, as on May 5, 2023 / Market cap change as compared to May 4

Merger to be completed by July, says HDFC Bank

In its March-quarter earnings, HDFC Bank’s management noted that the merger is likely to be completed by July 2023, post all the necessary regulatory approvals and shareholder confirmation. HDFC will merge into HDFC Bank.

The merger has received in-principle approvals from the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), the Competition Commission of India (CCI) as well as the National Company Law Tribunal (NCLT), among others.

“From a timing point of view, that June or July, possibly July, is where we think the time frame is,” said HDFC Bank’s chief financial officer Srinivasan Vaidyanathan in a post-earnings call with analysts.

While HDFC Bank’s March-quarter earnings were in line with analyst expectations, the next catalyst for India’s largest private sector lender is the merger. The stock has witnessed see-saw movement in 2023 so far, gaining 0.4% till date compared to a 0.1% decline in the Nifty Bank Index.


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