Merger of 10 PSBs into 4: Gains may not accrue soon for investors

Experts say concern over growth, credit cost, and asset quality would restrict valuation improvement despite sharp correction in share prices

Based on their closing stock prices on Thursday, when the share-swap ratios involving the combination of 10 public-sector banks (PSBs) into four were announced, the exercise looks beneficial only for the shareholders of Punjab National Bank (PNB), Oriental Bank of Commerce, and Syndicate Bank.
 
While the mergers are expected to improve the performance of the PSBs over the long term, concern over growth, market share gains, and credit cost could keep a lid on their valuations in the near to medium term.
 
Mona Khetan, analyst at Reliance Securities, says: “Past PSB mergers show that both asset quality and growth are affected in the four-six quarters after the merger, making the incumbents unattractive despite sharp correction in valuation multiples.”
 
In the current tepid environment, too, where credit growth is expected to remain moderate, pressure on market-share gains for PSBs would be more severe, even as their near-term capital position looks fair.
 
Analysts at Antique Stock Broking expect private banks, mainly the top five lenders, to gain more market share.
 
Factors such as technology advancement, faster branch expansion, and a sufficient capital base of the private sector as well as foreign banks have led to PSBs losing market share to the former in the past few years.

According to ICRA, the market share of private banks has improved to around 35 per as of September last year from 28 per cent as of March 2014.
 
Also, though PSBs have two-thirds market share, close to 50 per cent is held by the country’s largest bank, State Bank of India, which has a very large business base.
 
Lalitabh Shrivastawa, deputy vice-president at Sharekhan, says market-share gains would be difficult for PSBs as private players have been aggressively focusing on growth.
 
On asset quality, the merger process will lead to increase in gross non-performing assets (NPAs) of the anchor banks — PNB, Union Bank, Canara Bank,
and Indian Bank — by up to 580 basis points, based on the October-December 2019 numbers.
 
This, in turn, would keep credit cost (provisioning as a percentage of loan book) elevated for some more time.
 
Additionally, the impact of the ongoing economic slowdown and coronavirus on asset quality is still not clear, but is more likely to be negative.
 
India Ratings says the credit profiles of companies are likely to remain under pressure as the economy grapples with a synchronised and prolonged economic slowdown and so Rs 10.52 trillion, or 16 per cent of system level corporate debt, is vulnerable to default over the next three years.
 
This could keep the credit cost for the corporate banking segment, not just PSBs, under pressure.
 
Though some corporate loan accounts are expected to be resolved, Shrivastawa says recovery could get longer.
 
However, the likely gains over the long term are something still keeping experts hopeful about PSBs.
 
G Chokkalingam, founder and managing director, Equinomics Research Advisory, says: “The merger could improve the medium- to long-term business potential of PSBs. Most PSBs, which trade at a discount to adjusted book values now, are likely to see a significant premium to their adjusted book values in the medium term.”
 
For now, investors with less risk appetite are recommended “wait” till clarity on growth and asset quality emerges.