Stick with SBI's associates for now

Stay put till merger ratio with parent is announced, say analysts

Shares of all three listed associate banks of State Bank India (SBI) continued to move north for the second straight trading session in an otherwise weak market, rallying by up to 20% after the Union Cabinet on Wednesday gave a go-ahead to the merger of five associate lenders and Bharatiya Mahila Bank with State Bank of India (SBI).

All these three stocks had zoomed 20% each on Wednesday and traded at their respective fresh 52-week highs on the bourses. On Thursday, State Bank of Mysore (up 20% at Rs 657), State Bank of Travancore (19% at Rs 571) and State Bank of Bikaner & Jaipur (19% at Rs 712) were up more than 15% each as compared with 0.73% decline in the benchmark S&P BSE Sensex at 09:56 AM. SBI was trading 1% higher at Rs 218, after gaining nearly 4% on Wednesday.

Analysts say that the merger with associate banks has been one of the long-pending agendas and has come in earlier than what the Street was expecting. Branch rationalisation, if executed well, would be one of the key synergy benefits. Cost savings on account of treasury operations, audit, technology, etc would also lower cost-to-income ratio in the long term, analysts say. However, all this will take time to bear fruits, they caution.

"SBI will have to absorb the one-time merger cost as well. Having said that, the banks will not have to compete with each other for loan growth or market share going ahead. The Reserve Bank of India (RBI) has also been asking for cleaning up the balance sheets. So, it is a good time that by then the merger of SBI with these associate banks would also be taking shape. Post merger, the overall asset quality of SBI will also not deteriorate much given its stringent provisioning norms. As a result, the consolidated entity can target a good growth FY18 onwards," said Siddharth Purohit, an analyst tracking the sector at Angel Broking.

The merger will be positive for SBI's associate banks from valuation perspective also, as the current trading multiples of the associates - State Bank of Mysore, State Bank of Travancore and State Bank of Bikaner & Jaipur - are lower than that of parent SBI. Going ahead, analysts expect the valuation discount between SBI and its associates to narrow as the merger progresses.

Alpesh Mehta, deputy head of research for Institutional Equities at Motilal Oswal Securities, adds: "The merger is positive for listed associate banks. Currently, these associate banks are trading at around 0.6x P/BV (price-to-book) on trailing twelve month (TTM) basis, as against the parent, SBI's around 0.9x."

Given the run up in the stocks of associate banks over the past few sessions, Purohit though advises against making a fresh investment at the current levels, but suggests investors to stay put at least till the merger ratio with SBI is announced.