Next step in PSB consolidation process is some time away, say analysts

The current strength of banks and capital infusion plans of the government rule out an immediate merger

If the pace at which India’s largest bank, State Bank of India (SBI), merged its associate banks into itself took many by surprise, the ongoing merger of Vijaya Bank and Dena Bank with Bank of Baroda (BoB) is nothing less remarkable. After announcing the deal in September, swap ratios which go in favour of BoB were made public a few days back, indicating the merger process is moving in the right direction.

Given the thin chance of this not working out, investors should see a stronger BoB from April 1, 2020. There are a few takeaways from this merger that set the tone for possible deals. First, the larger bank having the wherewithal in terms of management bandwidth and balance sheet capabilities will lead the way. Second, the target bank, commensurate to its book quality, will be rewarded in terms of share swap ratio. “Banks with stronger balance sheet are likely to fetch better value for their businesses while weaker franchises, struggling with stressed loans and provisioning burden, are likely to be bailed out at a discount,” analysts at Elara Capital indicate. Lastly, the BoB’s structure also indicates the will of the government to diversify it geographically, while retaining its stronghold in the core region -- western and central India. 

The question, however, is how much time will it take for the next merger announcement. This is at least a couple of years away, say experts. The fact that there aren’t many strong banks left post the SBI and the BoB deals, and the government’s aggressive recapitalisation plan prompt many to feel so. 

“Till now, the mergers were led by a large bank and strong smaller banks. Now, there aren’t many names left from an acquirer and target entity perspective,” Pankaj Pandey, head of research, ICICI Securities explains.

The second largest public sector bank (PSB)–Punjab National Bank (PNB)–­­­­is still embroiled in scams unearthed last year. It has consequently pushed a meaningful improvement in PNB’s financials by at least four-six quarters. The other two large banks are Canara Bank and Union Bank. However, they don’t enjoy a broad pan-India canvas like that of BoB or PNB. Therefore, human resource integration may be more challenging than SBI's or BoB’s integration processes. Drawing regional synergies may also be challenging for the two banks given how Canara Bank is stronger in the southern market and Union Bank in western India. 

There are also fewer candidates that are not in the purview of prompt corrective action (PCA). After Vijaya Bank merger with BoB, Indian Bank is the only profitable candidate left.

Also, with the government infusing the right amount of capital since late 2017, many analysts say, the move should help weaker franchises deal with the bad loan write-off. In fact, news reports suggest that Bank of India may receive about Rs 10,000 crore of capital in the next round fund infusion and this should be adequate to bring the bank out of the PCA framework. “With capital coming in, the next round of mergers would be led by the weaker banks which are inclined in this direction,” says Nilesh Shah, MD & CEO, Envision Capital. Therefore, he strongly believes that the next wave would depend on how capital has been consumed by PSBs.

A few also sound off that the outcome of the 2019 general election will be critical to set the tone for mergers. “PSB mergers are considered anti-populist. But they are bold and need-of-the-hour measures. To take the step forward, a lot depends on who forms the government this year,” says an analyst with a domestic brokerage. However, the consensus opinion is the next step in the consolidation process is some time away.