Mega merger of public sector banks is a good move, but ill-timed: Analysts

Fear of credit growth, particularly for larger banks, spooked PSB stocks on Tuesday

The merger of public sector banks (PSBs) may be the much-needed long-term positive for the sector. However, their stock prices didn’t echo these sentiments when trade opened after an extended weekend.

Stock prices of anchor banks, or those absorbing the smaller franchisees such as Punjab National Bank (PNB), Canara Bank, Union Bank of India, and Indian Bank, fell over 8–12 per cent. Interestingly, investors — even in the feeder or the smaller banks which have in the last three-four quarters exited from the prompt corrective action (PCA) framework — weren’t too excited with the idea of being taken over by their larger peers. 

For the larger banks, particularly for PNB and Union Bank, the exercise does address the issue of capital adequacy. But the question is, whether they have the bandwidth to absorb the smaller peers.

For instance, hit by scams, PNB is just about making a comeback in terms of growth and setting aside its asset quality issues. Yet at 15.5 per cent gross non-performing assets (NPAs) ratio, they have some quarters to go before reducing the number to an acceptable level.

Same is the case with Union Bank. Canara and Indian Bank seem somewhat better on this front. But at 7-8 per cent gross NPA, they are far from comfortable when compared with their private peers.

Asset quality issues apart, whether the banks, particularly the anchor banks — which also play a significant role in the credit landscape — can gear themselves to the merger without comprising on growth is an equally important fact to consider.

The current fiscal year (2019-20) is anticipated to be a year of growth, particularly for PSBs. Examples of consolidation in the past such as State Bank of India (SBI) and Bank of Baroda (BoB) have revealed how the process consumed sizeable time of management bandwidth, thus, involuntarily having a cascading effect on growth and financials.

“Mergers would come with their drags in near term on growth and profitability,” say analysts at Nomura. “Mergers in the past have led to short-term balance sheet consolidation and meaningful cost to financials, aligning NPA norms and/or provisions, pension, and tax provisioning,” they add.

Therefore, even as gains from the merger in the long run are well-acknowledged, the Street’s apprehension about near-term growth has restricted analysts from being entirely positive on the development.

Some fear the merger may not solve the present problem of limited credit availability. Considering past examples, coupled with the ongoing moderation in growth for private banks led by auto sector slowdown and increased cautiousness and credit growth may not be revived by PSB mergers, say analysts at Credit Suisse. The brokerage is particularly cautious on availability of bank credit for non-banking financial companies (NBFCs).

“The merger is also unlikely to meaningfully revive flow of credit to liquidity-starved NBFCs, given the already high share of NBFC exposure in constituent banks,” the brokerage flags off.

According to its estimates, all four merged entities will have more than 10 per cent of their loan exposure towards NBFCs. “Hence, credit flow to NBFCs will remain a challenge,” they note. If this be the case, experts say it could further compound the existing liquidity woes across sectors.

Commentary from PSBs in the September quarter and how well they managed to grow their loan book will hence be critical for the Street to gauge the appetite for PSB stocks. For now, analysts remain positive largely on SBI, though BoB with merger overhangs gradually withdrawing is finding favour with the Street. They remain largely averse to other PSBs.