Most brokerages expect the merged entities of public sector banks
(PSBs), dubbed NextGen PSBs by Finance
Minister Nirmala Sitharaman, to post losses for another year. But this assumption is based on FY19 numbers, which went by as an extended year of asset quality clean up. Cut to FY20, the narrative, including that of recapitalisation, is being weaved around ensuring growth. Therefore, Punjab National Bank (PNB), Canara Bank, Union Bank and Indian Bank have their work cut out in the next three quarters. Not only they must ensure that the merger concludes smoothly, but they need to do so without taking their focus off growth, a factor that is extremely critical to win back lost investor trust.
With the merger and recapitalisation likely to happen more-or-less simultaneously, the development is expected to significantly shore up capital and in an efficient manner. For instance, in the case of PNB and Union Bank, which worked with 7.5–8.6 per cent common equity tier-1 (CET1) capital in FY19, analysts expect the number to shoot up to 9.8–10.6 per cent when the fund infusion and merger gets completed. “There is an increase in CET1 ratio of 90-260 basis points (bps) across the board and this seems to be the biggest booster for PSBs,” says Siddharth Purohit of SMC Capital.
Moreover, the deposit base is also bound to increase, which will provide the post-merger PSBs enough ammunition for growth, especially at a time when capital is turning expensive for the system. In the case of Canara Bank and Indian Bank, where the share of low-cost current account–savings account (CASA) deposits is currently low, the two are expected to gain in the merger process.
Cost-benefit from the rationalisation of branches and systems, too, may accrue as the merger assumes size. For instance, over FY18–FY19, State Bank of India has reduced its branch strength by at least 10 per cent and mostly in metro cities where duplication was the highest. The other important development in the entire lending space is that Canara Bank and Union Bank will feature higher up in the overall league table.
Post consolidation, all positions but one (HDFC at the third spot) in the top six will be occupied by PSBs — a factor that will give them better room to negotiate on pricing products and loan resolution.
Also, the merger provides a platform for banks
to strengthen their positions in pockets which aren’t their core domain. For instance, Canara Bank, whose portfolio is more corporate and home loan heavy, will boost its presence in the small business loan category after Syndicate Bank’s merger with it. Likewise, for PNB, the merger of United Bank and Oriental Bank of Commerce into it, will boost the bank’s retail presence. Union Bank will become stronger in the southern market given the relevance of Andhra Bank and Corporation Bank in these pockets. For Indian Bank, the merger of Allahabad Bank would provide it with a deeper penetration into the North India market. But, then again like cost rationalisation, gains in the financials will reflect only over the medium term.
But are perceived long-term gains alone enough to elicit investor interest in the stocks of PSBs? Not quite, says Suresh Ganapathy of Macquarie Capital. “Stock price erosion seen in Bank of Baroda after the merger (of Dena and Vijaya Banks
into it) was announced till date indicates that merger in the near term may be value-depletive,” he points out. Analysts at JM Financial point out that a significant proportion of management/employee bandwidth is likely to be consumed/diverted away from growth and resolutions, and could be a drag on the overall environment. “We maintain our cautious stance on PSBs,” they add. Those at Edelweiss Research say there is little for investors to cheer about outside of SBI, BoB and Bank of India.
While the June quarter wasn’t dull in terms of loan growth, unless the merger candidates remain focused on the growth path, regaining and sustaining investor interest beyond the initial euphoria could be difficult.