The government announced mergers of leading public sector banks (PSBs) in post market hours on Friday. While most analysts term it as a step in the right direction, they do caution that the gains will accrue only over the long term.
Unlike private banks, most PSBs, analysts say, do not have clear specialisations and end up competing against each other. With stretched credit-deposit (CD) ratios of most major private banks, acceleration of credit growth depends primarily on PSBs. The consolidation / merger, analysts expect, will increase for PSBs.
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Here’s how leading brokerages have interpreted the development:
We view consolidation of PSBs as a big positive as many PSBs were duplicating each other’s business model. Hence, consolidation should enable scale, help reduce cost and lead to more efficiency gains. Although this is a medium-term positive, in the short-run, consolidation may divert attention of PSBs away from growth towards merger.
Another challenge will likely be ensuring greater synergies and suitably handling bad assets of the merged banks. In our view, governance reforms also need to be implemented in practice, not just on paper, by these merged entities.
Given the persistent structural challenges facing mid-sized PSU banks, consolidation was imminent. However, the one-go approach came as a surprise. Of the potential acquirers Punjab National Bank (PNB), Canara Bank (CB), Indian Bank (IB) and Union Bank of India (UBI) are at the forefront of this consolidation plan, leaving out Bank of India.
Though swap ratios are not known, based on operating parameters we rank Indian Bank and Allahabad Bank, followed by Canara Bank and Syndicate Bank as a relatively better combination.
Consolidation comes with its own set of challenges in human resources (HR), process integration, branch rationalisation etc; besides financials and transition will take time. Ideally, value lies in place outside the involved banks and within this space. We like State Bank of India (SBI), as it is better positioned to grow when 25 per cent of the system credit is in consolidation phase.
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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.
ANAND RATHI RESEARCH
With the weaker-than-anticipated GDP growth in Q1FY20, government is focusing on strengthening the PSBs to harness efficiency and revive credit growth. A clear trend has been established by the government with the earlier mergers in the public sector banking space, recognising there is no need for so many PSBs with similar business models. We believe this is a step in the right direction as fewer PSBs with larger balance sheets and stronger liability franchises would have more sound credit growth and also command better valuations.