Smaller PSBs may not come cheap in future M&As: Oriental Bank, UBI indicate

Post asset quality clean up, Oriental Bank and United Bank have stated their intent to be acquirers and not targets in the process of consolidation

Usually, the results of smaller public sector banks (PSBs) don’t invoke much interest from investors. However, it was different in the case of Oriental Bank of Commerce (OBC) and United Bank of India (UBI). 

Both banks, which draw a bulk of their business from the eastern and north-eastern regions, have lately made rather strong statements that they would like to be seen as strong acquisition candidates, not as targets. 

Coming from banks with balance sheet strength of Rs 2.65-4.85 trillion, these statements took many by surprise. The circumstances under which these banks sent out such messages were equally astounding. 

For one, OBC slipped out of the Reserve Bank of India’s (RBI’s) prompt corrective action (PCA) framework in January, while UBI may take a few more quarters considering its financials. 

Although both banks closed the year with net profits in the March quarter (Q4), FY19 was, overall, another year of loss. 

In the fourth quarter, OBC’s net profit stood at Rs 201 crore and gross non-performing assets (NPA) ratio at 12.7 per cent, while for UBI it was Rs 95 crore and 16.5 per cent. 

To reach a sub-10 per cent mark, both may have to undertake rigorous asset quality repair, which could be quite capital-guzzling. 

OBC and UBI are planning to raise Rs 3,000 crore and Rs 1,500 crore in capital, respectively. Several rounds of infusion over the past two years have helped them achieve a capital adequacy ratio of 12-13 per cent in Q4. 

While consolidation may not be a capital-intensive exercise in itself, there is considerable cash burn in the run-up to the same, and after the merger. Whether the two banks have the wherewithal for it is the question.

Experts, however, believe one shouldn’t sideline the intent of the two with respect to mergers. “Even if they are not acquirers, these statements indicate they are strong enough to absorb portfolios from banks or non-banking financial companies,” says Nilesh Shah, MD of Envision Capital. 

Effectively, he says, OBC and UBI may expect a reasonable premium if merged with larger banks, unlike Dena Bank that folded into Bank of Baroda for a steep discount. 

The final word, though, would rest with the majority shareholder — the Centre.