PSB merger on expected lines; buy stocks for the long-term: Analysts

Investors need to understand the share swap ratio and the other details of the proposed merger, analysts caution

Analysts have given a thumbs-up to the government’s move to consolidate public sector banks (PSBs). Calling it a step in the right direction, analysts say this merger could be a game changer for the PSU banking space over the long-term. 

While they see the related PSU bank stocks reacting to the development when markets open for trade next week, they suggest only those investors who can hold from a long-term horizon buy into these counters. Investors need to understand the share swap ratio and the other details of the proposed merger, they caution. That apart, there could be challenges as regards integration and the likely benefits of the amalgamation will take a long time to play out, they said.

“The announcement was overdue. There are synergies to be had from the proposed merger, but all this will take a long time to play out. That said, a bounce in the related counters cannot be ruled out, which the investors can capitalise on,” said Ambareesh Baliga, an independent market analyst.

G Chokkalingam, founder and managing director at Equinomics Research agrees. He expects economies of scale to kick-in overtime if the proposed merger fructifies on-ground and aid financial performance.

“The government now needs to bring down its stake in the PSU banks. This can change the face of banking sector in the country for good. At the current levels, PSU banks can be bought from a long-term perspective,” Chokkalingam says.

On the other hand, analysts at IIFL do not seem too enthused with the proposals and caution that except for growth on current account, savings account (CASA), and reduction in cost to income ratio, the merger of Bank of Baroda with Vijaya Bank and Dena Bank in 2018 was not appreciated by the market. That apart, the proposed merger of relatively better run Indian Bank with Allahabad Bank came in as a disappointment, they believe.

“We have not seen any significant fall in the credit cost leading to continued pressure on the stock price of BOB. Merger of relatively better-run Indian Bank with Allahabad Bank is disappointing. It may be lack of appetite for some of the weak bank that they were left out of this merger exercise. Considering that still three fourth of saving accounts are with PSB and that there could be significant cost savings by merger, we do see this to be positive for the sector for a longer-term perspective. Immediate release of funds for growth will ensure improvement in loan growth for the banks,” said Abhimanyu Sofat, Head of Research at IIFL Securities.